I take note that the 'indicators' are usually based in numbers which, upon further
inspection, are rosy at the very least. Indicators for main street activity is particularly bad
and skewed. Greenspan was the genius behind this going back sometime ago, with beautiful headline
numbers but when one took a look (if one could) you would find that much was left out.
So we
are left, as the government is basically lying or misleading us, to try and figure it out. We
speculate, we find others who have analytical skills to do what others of us cannot. We listen
to the 'on the street views' of others. The faith in the methods behind decades of increasingly
distorted headline numbers, particularly in the '90s, was like watching Jim Jones give a speech
to his faithful, fully accepting for support of their own selfish motivations and endorphin-laden
highs.
If you read “Barbarians at the Gate” what was most striking is that companies
that get destroyed are PROFITABLE – but it is MORE profitable for a few to strip mine them. In
the religion of economics, God has forgotten them… We use certain metrics that says this
increases GDP, and therefore it MUST be done – like the character in Harry Potter whose name
can never be uttered, we can never, ever speak of the distribution of the vaunted GDP. As
I’ve said many times, inequality is a political choice. I fear our system has been so
thoroughly infiltrated by the self absorbed that it is now impossible for any meaningful
reform.
Above the law demi-god banksters (I call them financial terrorists) are
re-creating the world in their own image. Thank Obama and Holder for placing them above the
law.
There are two distinct types of GDP: nominal and real
Nominal GDP refers to the following total of final goods and services: all those
goods and services are to be consumed by their final user (in particular year), and not used as an input
into other goods this year. But the devil is in details: how you define final goods and services.
Real GDP is corrected for inflation. Correct calculation of real GDP depends on correct
calculation of inflation, which is the most politicized of economic metrics and as such subject
to tremendous level of manipulation.
If a country becomes increasingly in debt, and spends large amounts of income servicing this debt
this is not reflected in a decreased GDP. GDP does not take into account change in country population
iether, but per-capita GDP accounts for population growth.
Citing Wikipedia
In
economics, gross domestic product (GDP) is a measure of the value of economic production
of a particular territory in
financial capital terms
during a specified period. It is one of the
measures
of national income and output. It is often seen as an indicator of the
standard of living
in a country, but there may be
problems with this view. GDP is often abbreviated as
Y.
GDP is defined as the total value of final goods and services produced within a territory during
a specified period (or, if not specified, annually, so that "the UK GDP" is the UK's annual
product). GDP differs from
gross national product
(GNP) in excluding inter-country income transfers, in effect attributing to a territory the product
generated within it rather than the incomes received in it.
Whereas nominal GDP refers to the total amount of money spent on GDP, real GDP adjusts
this value for the effects of
inflation in order to estimate the actual quantity of goods and services making up GDP. The
former is sometimes called "money GDP," while the latter is termed "constant-price" or "inflation-corrected"
GDP -- or "GDP in base-year prices" (where the base year is the reference year of the
index used). See
real vs. nominal in economics.
GDP measures only final goods and services, that is those goods and services that are
consumed by their final user, and not used as an input into other goods.
Measuring intermediate goods and services would lead to
double counting of economic
activity within a country. This distinction also removes transfers between individuals and companies
from GDP. For instance, buying a Renoir
doesn't boost GDP by $20m. (If it did, buying and selling the same painting repeatedly to a gallery
would imply great wealth rather than penury.)
Note that the Renoir purchase
would affect the GDP figure, but not as a $20m receipt, the
auctioneer's fees would appear
in GDP as consumption expenditure, because this is a final service.
The most common approach to measuring and understanding GDP is the expenditure method:
Consumption and investment in this equation are the expenditure on final goods and services. The
exports minus imports part of the equation (often called net exports) then adjusts this by
subtracting the part of this expenditure not produced domestically (the imports), and adding back
in domestic production not consumed at home (the exports).
Economists (since Keynes) have
preferred to split the general consumption term into two parts; private consumption, and
public sector spending.
Two advantages of dividing total consumption this way in theoretical macroeconomics are:
Private consumption is a central concern of
welfare economics.
The private investment and trade portions of the economy are ultimately directed (in mainstream
economic models) to increases in long-term private consumption.
If separated from endogenous
private consumption, Government consumption can be treated as
exogenous, so that different
government spending levels can be considered within a meaningful macroeconomic framework.
C is private consumption (or Consumer expenditures) in the economy. This
includes most expenditures of
households such as food, rent, medical expenses and so on.
I is defined as business
investments in
capital. Examples of investment by a business include construction of a new
mine, purchase of software,
or purchase of machinery and equipment for a factory. 'Investment' in GDP is meant very specifically
as non-financial
product purchases. Buying financial products is classed as
saving in
macroeconomics, as opposed
to investment (which, in the GDP formula is a form of spending). The distinction is (in
theory) clear: if money is converted into goods or services, without a repayment
liability it is investment.
For example, if you buy a bond
or share the ownership of the
money has only nominally changed hands, and this
transfer payment is
excluded from the GDP sum. Although such purchases would be called investments in normal
speech, from the total-economy point of view, this is simply swapping of
deeds, and not part of the
real
economy or the GDP formula.
G is the sum of government expenditures on final goods and services. It includes salaries
of public servants,
purchase of weapons for the millitary, and any investment expenditure by a government. It does
not include any transfer payments, such as
social security or
unemployment benefits.
The relative size of government expenditure compared to GDP as a whole is critical in the theory
of crowding out,
and the
Keynesian cross.
NX are "net exports" in the economy (gross
exports - gross imports). GDP captures the amount a country produces, including goods and services
produced for overseas consumption, therefore exports are added. Imports are subtracted since imported
goods will be included in the terms G, I, or C, and must be deducted to avoid
counting foreign supply as domestic.
It is important to understand the meaning of each variable precisely in order to:
Another way of measuring GDP is to measure the total income payable in the GDP income accounts.
This should provide the same figure as the expenditure method described above.
The formula for GDP measured using the income approach, called GDP(I), is:
Compensation of employees (COE) measures the total remuneration to employees for work
done. It includes wages and salaries, as well as employer contributions to
social security and
other such programs.
Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses.
Often called profits, although
only a subset of total costs are subtracted from gross output to calculate GOS.
Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses.
This often includes most small businesses.
The sum of COE, GOS and GMI is called total factor income, and measures the
value of GDP at factor (basic) prices.The difference between basic prices and final prices (those
used in the expenditure calculation) is the total taxes and subsidies that the Government has levied
or paid on that production. So adding taxes less subsidies on production and imports converts GDP
at factor cost to GDP(I).
Simon Kuznets, the economist
who developed the first comprehensive set of measures of national income, stated in his first report
to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":
The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements
especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity
in the outlines of the object measured. Measurements of national income are subject to this type
of illusion and resulting abuse, especially since they deal with matters that are the center of conflict
of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification.
[...]
All these qualifications upon estimates of national income as an index of productivity are just
as important when income measurements are interpreted from the point of view of economic welfare.
But in the latter case additional difficulties will be suggested to anyone who wants to penetrate
below the surface of total figures and market values. Economic welfare cannot be adequately measured
unless the personal distribution of income is known. And no income measurement undertakes to estimate
the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning
of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national
income as defined above.
In 1962, Kuznets stated:
Distinctions must be kept in mind between quantity and quality of growth, between costs and returns,
and between the short and long run. Goals for more growth should specify more growth of what and
for what.
Continuing progress should not lead to ever-escalating levels of consumption, but to a society
where improving productivity and technology would provide higher quality goods, better health and more
leisure. GDP never measured economic efficiency of the country; it measures
the level of economic activity. Healthcare is a classic example. The USA spends 20% to
subsidize maladaptive behavior between producers and consumers in the medical food chain.
The other problem with GDP, which the USA actually shares with the USSR is that quantity is substituted
for quality. In other word GDP does not measure the quality of products sold or services provided (actually
some country now include income from prostitution in GDP).
As Paul Krugman
has pointed out, generally Europeans has better understanding of this problem with GDP then Americans
and thus less susceptible to the "cult of GDP" which dominated the USA economic discourse. There are
also other areas where Americans place too high priority on quantity sometimes in detriment to quality.
For example, proliferation of "House slaves" is a classic example of overconsumption.
In this case overconsumption of housing
as measured by size. It is highly negative phenomena, but it does increase GDP.
In GDP, the quantity is substituted for quality. Also calculation has political dimension
and as a result American GDP figures are wildly distorted (hedonic adjustments, etc).
Also many components of GDP (especially FIRE -- finance, insurance and real estate) might be partially
anti-social and their fast growth (which as services is reflected in GDP) might be detrimental for the health and prosperity of
society. Jesus attitude toward bankers is well known and probably was not without the reason ;-)
Another example is sales of high sugar context flavored water called Coca Cola and Pepsi Cola. It is negatively affect
children health leading to obesity and early diabetes, but it is positively reflected in GDP.
The same, even more drastic example is production of arms.
Overstatement of GDP and other economic metrics due to effects of outsourcing. An article
in New York Times by Louis Uchitelle pointed out long known fact that foreign outsourcing
of component manufacturing distorts statistics and has led to consistent overstatement of U.S. GDP
and productivity. The connection goes a long way to explain why we keep losing jobs even as GDP is
apparently expanding.
The strength of consumer spending which is the dominant part of GDP reflects mainly the demand
of the rich. Ajay Kapur of Citigroup has described America as a “plutonomy” where
the top 20% account for nearly 60% of all consumption while the bottom
fifth spend just 3%. There are more then 8 million millionaires in the USA. And the
rich are, as F. Scott Fitzgerald said, different from you and me.
According to Ajay Kapur "the rich matter far more than the 'average'
consumer; that may explain why American demand was so robust in the face of higher petrol prices."
Watching that their purchases increase may be entertaining but of little economic value. Instead
of the rich, we should be looking at the broader population. [Buttonwood
The rich are different Economist.com].
GDP statistics is not corrected for 'conspicuous consumption": consumption that is not
directed in satisfaction of any real need and that often actually harms people. Abuse of painkillers
is an extreme example. If a harmful drug is taken off the shelves, GDP suffers. Similar problem exists
with is side-effects of fast food epidemics. Obese people spend around $30-50 billions a year in
weight-losing products. Those spending do not raise economic well-being, just the opposite they compensate
harm caused by fast food industry.
If pharmaceutical industry conducts an expensive marketing companion of questionable or even harmful
drags and reaps billions from it, GDP increases. And this practice was the major driver of pharmaceutical
industry for the last 20 or more years (with the emergence of "blockbuster" drag concept, like all
those cholesterol lowering drags, recreational drugs like Viagra, etc)
The same is also true for soft drinks industry: increases in selling of caffeinated high sugar
solutions like Coca-cola and Pepsi has nothing to do with the increased economic well-being of the
society, but increase the spread of diabetis. This is just conspicuous consumption, but only designed
for poor and lower middle classes. Along with the rate of diabetics it might increase other serious
diseases in the in the population too.
Cooperative societies (societies that have high level of government services) have lower GDP
then societies were everything is privatized. Government-sponsored health-care and education
decreases GDP. That means that you simply cannot compare GDP of Canada and USA without serious additional
research, but this effect alone makes GDP questionable measure in comparing two different countries,
although it is does not prevent year-to-year comparisons in the same country.
Peaceful societies, characterized by a lower level of crime (and consequently legal activities,
prisons, etc.) are penalized in terms of GDP! The same is true for countries with a healthy way
of life! BTW drugs to cure fast food effects on health and low mobility induced excessive weight
are multi-billion industry.
GDP is positively affected by any large destruction, for example caused by Katrina. The
latter might actually saved the USA from registering an economic slum in 2005: “Burn Paris and you will make GDP
grow!”. GDP only includes positive values: if something is destroyed, then rebuilt by a private
company, GDP goes up while economic well-being is unchanged or even became worse.
War expenses increase GDP. As Major General Smedley Butler once noted
"War is a racket. It always has been. It is possibly the oldest, easily the most profitable,
surely the most vicious."
As such wars positively affects GDP as profits are reckoned in dollars and the losses in lives.
Destruction or wear of equipment, medical developments for better treatment/recovery of wounded soldiers,
spillovers into civil sector of intensified research and development for creation of new types and
modernizing existent types of weapons and defenses against new types of enemy attacks all positively
contribute to GDP. Recessions are almost impossible as long as a country is engaged on protracted
war.
In a way the calculation of GDP became just a complex (and by-and-large counterproductive) ritual
not unlike some religious rituals like calculation of certain dates. That's why we can talk about "Cult
of GDP" as a religious phenomena.
This cult has mirror image in large corporate behavior. Both on the level of society and the level
of large corporation if the metric is wrong, then the policy based on it is destructive.
It looks like "cult of GDP" which definitely represent dominant economic religion in the USA is very
similar to the cult of GDP which existed in the USSR. And like in the USSR GDP is very
misleading, politically distorted metric of economic well-being of the country. As Yves Smith observed
in comments to
Krugman on the Need for Jobs Policies
American GDP figures are wildly distorted, this has never gotten the
press it deserves. The US is the ONLY economy that uses hedonic adjustments to GDP.
That means it increases GDP to allow for the fact that computers have become more productive over
time (this is completely different than the hedonic adjustments for inflation, BTW).
A modern desktop computer is about as powerful as a mainframe as of late 1980s. So I kid you not,
these adjustments started in 1987, and they count your desktop in GDP as the same value what the
equivalent big iron computer would have cost in 1987. Mish managed to
get the BEA to send him a spreadsheet in 2005, and it showed the cumulative impact was 22% of GDP.
This is far and away the most dubious of the official statistical adjustments, and
gets far and away the least commentary.
The Bundesbank has also complained a few years ago that if German calculated GDP the way the US
did, it’s growth rate would be a half a percent higher. If you take the Bundesbank figure instead,
and calculate GDP growth over 22 years, using 2.5% versus 3.0% growth, you get an 11% cumulative
difference.
There is other, more dangerous aspect of GDP is that tail wags the dog --
it implicitly stimulated counter-productive behavior of government and its
major economic agents in order to boost GDP. In a recent article by Samuel Brittan (Financial
Times) put it very well:
A typical talk on BBC’s Radio Three might start by bemoaning the consumer society, with its passion
for shopping and the rush to make pointless purchases. It might then bemoan the nervous strain in
the quest for economic growth and the lack of time or energy for more worthwhile activities.
But then comes a more interesting twist. All this frenzy of pointless activity is required, it
is said, to keep the economy going. Without it, the implication is, production would dry up and jobs
disappear, and we would wallow in semi-permanent depression.
The contention is that the economy would collapse if we ceased to
demand more and more, a belief sometimes called the saturation bogey. Many practical
businessmen, who have no time or inclination for political economy, suppose that we must go on churning
out more and more to survive, whether or not we enjoy the process. The US president Calvin Coolidge
remarked in 1926: “The chief business of the American people is business.” UK politicians
used to ask what would happen when every family in the country had two cars.
The clue to the whole matter is provided, as so often, by a dictum from Adam Smith: “Consumption
is the sole end and purpose of production; and the interests of the producer ought to be attended
to, only so far as it may be necessary for promoting that of the consumer.” To demonstrate the falsity
of the belief that we must continue to feed the productive machine with ever more ridiculous demands,
let me indulge in a brief thought experiment.
Let us take a medium-sized, western economy with no major population change and negligible net
migration or other problems. What might then happen if a majority of people were to turn their backs
on further improvements in their real spending? The basic answer is that, in this no-growth new world,
people could enjoy the fruits of technological progress with a mixture of increased leisure and a
more congenial and relaxed working life. The reduction in labor input
would be voluntary and completely different from what happens in an economic slump.
Some political economists have looked forward to this state of affairs.
John Stuart Mill regarded what he called the “stationary state” as a delight rather than a
disaster. He could not believe that the perpetual struggle to get on and elbow other
people out of the way was other than a temporary phase in humanity’s progress. Keynes also looked
forward to such a world (in his essay “Economic Possibilities for our Grandchildren”) when “we shall
honor the delightful people who are capable of taking direct enjoyment in things: the lilies of the
field who toil not, neither do they spin.” He allowed for the persistence of a minority of people
who would feel satisfaction only if their behavior made them feel superior to their fellows, “but
the rest of us would no longer feel under any obligation to applaud”.
There is another view, stated most eloquently by Joseph Schumpeter. As he put it:
“Capitalism is by nature a form or method of economic change and not
only never is, but never can be, stationary.”
Let us concede at once that the resulting system would not look much like capitalism as we know
it. But even in such a society there would be great advantages in retaining competitive markets based
on private ownership. Those who have now, belatedly, discovered Schumpeter and quote him out of context
do not realise that, writing in the 1940s, he expected entrepreneurial capitalism to have died out
long ago and be replaced by some variant of state socialism. He failed to see how unworkable the
latter would be. Like many other seers he was an excellent analyst, but a poor prophet.
As soon as we add more realistic conditions, the saturation bogey
becomes more and more remote. Even if demand for conventional consumer goods were
to peak, there might still be demand for more public services and more expenditure to relieve poverty
at home and abroad. Most western countries are likely to see net immigration for the foreseeable
future, which would bring with it opportunities for new investment without any need for whipping
up artificial needs and anxieties. This is not to speak of devoting a margin of extra production
to dealing with environmental threats, whether or not of a global warming variety.
But there’s a second way to count how much we produced -- GDI, or Gross Domestic Income. It’s what
we got paid to produce the GDP. We break-up GDI according to the type of income being paid and to whom.
Roughly it’s wages, profits, interest, and taxes.
If we assume that income = spending then GDI should be equal to GDP. It’s an after-the-fact necessity
of the accounting framework by definition. But it’s also a useful concept for analysis of disequilibrium
and dynamics. After all, think of what happens in the following scenario. Suppose every month we spend
$1000 and we get paid $1000. Income = spending.
But suppose some month, income declines unexpectedly
to $900. In the month the income declines, we either cut our spending short to adjust to the new lower
income, or we borrow (or spend from accumulated financial assets) to make up for the shortfall and adjust
our spending the following month. In this scenario, we can identify that when income from productive
sources = spending we have an equilibrium in the economy and no changes are expected. But if income
is less, then we are at a disequilibrium and can expect changes.
Here are two articles that discuss this subject further, but the idea is that GDI can be used for
checking GDP number produced for fudging.
A couple of years ago, we did a
long Q&A with Fed staff economist Jeremy Nalewaik about his work on the differences between Gross
Domestic Product and Gross Domestic Income.
The two indicators, as you would expect given their theoretical sameness, tend to be nearly identical
over a long enough stretch of time. GDI is interesting mainly because Nalewaik had found that its
early estimates tend to be revised less over time than are initial estimates of GDP.
In English, this suggests that GDI is a more accurate early measure.
And it was worth noting because in the burgeoning stages of the Great Recession, the early GDP
estimates dramatically understated the severity of the US economy’s decline. Had more people been
paying attention to GDI, which was flashing warning signs earlier, the policy response might have
come sooner and been more aggressive.
On Thursday morning, GDI for the fourth quarter of last year was revised from an annualised 2.6
per cent to a whopping 5.5 per cent, while GDP growth for the same quarter stayed at 0.4 per cent.
Quite a divergence.
Yet both GDP and GDI now report the exact same growth rate for the full-years 2011 and 2012 —
1.8 per cent and 2.2 per cent respectively.
And if you look closely at Thursday’s release (Appendix
Table A), during those two years you’ll notice bigger quarterly swings in GDI, swings that have
corresponded roughly with the winter booms and spring swoons that some other economic indicators
have also shown. If you further look at the excel spreadsheet that pops up when
clicking
on this BEA link, you’ll see that GDI itself since that time has been no stranger to large revisions
later.
Nalewaik himself emphasised that some weighted average of GDP and GDI is preferable to using only
GDI. And reporting wider swings also seems to apply for GDI over longer stretches of time — ie after
plenty of revisions — as you can see in
this chart from Tim Duy:
The trends essentially smoothen out to show the same thing.
We in the blogosphere make a lot of hay about the likelihood that early releases of any given
indicator are likely to be revised over time. Certainly we
do this with the employment reports. But to change our tune a bit on the matter of GDP vs GDI,
over a long enough period of time the difference isn’t that big a deal — and over shorter periods
of time, neither is all that reliable. As such, an average of the two really is probably best.
A lot of attention has been given to methodological issues with the inputs that generate growth
statistics these past couple of years; for instance the difficulty of properly accounting for services
in an economy that is increasingly dominated by them (try page 52 of last year’s
Economic Report of the President).
It’s great news, of course, that the individual components of GDP are getting increased attention,
and indeed GDP itself is getting a fairly big makeover this summer when R&D will be capitalised and
certain other intangible assets will be
counted differently.
The added attention and changes should also remind us that, as Karl Smith has been
playfully harrassing us to acknowledge for a while now, GDP and GDI are just the outputs of methodological
processes. They’re numbers, sums.
But in an economy with relatively transparent indicators like those in the US, there’s no reason
that commentators can’t just go straight to the individual components to look for underlying trends
— especially since these components are of varying relevance at different times. For one example,
consider the
decline in defense spending of the kind that is predictable and normal when winding down a war;
it contributes to GDP but might say less about fundamental economic strength than, say, changes in
consumer behaviour.
This isn’t an argument that the final number should be ignored. It shouldn’t: for people who don’t
spend their lives reading economics blogs, it is still an easily accessible way to discuss what’s
happening, even if the media should always include the caveat about future revisions. (We’re also
a paid-up member of NGDPLTargeting, and we’re gonna need something to target!)
But for purposes of discussing in detail the health of the economy, it’s better to pick things
apart. That’s not as easy as pointing to a single number, but nobody said real-time economy-watching
was supposed to be easy.
This entry was posted by
Cardiff Garcia
on
Thursday May 30th, 2013 21:36. Tagged with
GDI,
GDP.
"...GDI is identical to GDP in theory. Money used to purchase goods and services becomes someone's
income in one way or another. But GDI differs in practice due to the way the national income and product
accounts are constructed."
"...The first new measure, called gross domestic output (GDO), is now published by the Bureau
of Economic Analysis. It's simply the average of GDP and GDI. Adjusted for inflation, here is how it
compares to GDP:"
"..."the simple average -- what we have called GDO -- of the initial estimates historically has
been a better gauge of the latest and presumably most accurate estimates of GDP growth than either GDP
or GDI individually as well as a more stable predictor of future economic growth. Moreover, using GDO
helps at least partially to resolve some recent economic anomalies. As a result, GDO offers a valuable
new source of information for households, businesses, researchers, and policymakers seeking to understand
economic issues in real time.""
"...However, while both GDO and GDPplus improve on using GDP or GDI alone, neither alternative
overcomes all the problems with GDP and GDI, particularly the lag of several months before data on GDP
and GDI first become available. In addition, it can be as long as several years before all the important
data revisions are completed, and forecasts beyond a quarter or two ahead are unreliable"
How well is the U.S. economy doing, and where might it be heading in the future?
To answer these
questions, we need a way to assess the total amount of goods and services the economy is producing
in a given time period. One measure of this quantity, gross domestic product (GDP) is well known.
It estimates the total value of new goods and services produced in the U.S. over a given period,
usually a quarter or a year. (Also, the goods must pass through organized markets, so black market
activity and goods produced in homes aren't counted.)
However, there's another way to arrive at this estimate of total economic activity: gross domestic
income (GDI).
GDI is identical to GDP in theory. Money used to purchase goods and services becomes someone's
income in one way or another. But GDI differs in practice due to the way the national income and
product accounts are constructed.
Thus, because neither measure is perfect on its own, and the errors in GDP and GDI are largely
independent, it should be possible to combine the two measures to improve our estimate of how well
the economy is performing in a given time period. That's what two recent strands of research are
attempting to do.
The first new measure, called gross domestic output (GDO), is now published by the Bureau
of Economic Analysis. It's simply the average of GDP and GDI. Adjusted for inflation, here is how
it compares to GDP:
The graph is from a recent
Issue Brief published by the Council of Economic Advisors. It discusses this new measure and
notes that
"the simple average -- what we have called GDO -- of the initial estimates historically
has been a better gauge of the latest and presumably most accurate estimates of GDP growth than
either GDP or GDI individually as well as a more stable predictor of future economic growth. Moreover,
using GDO helps at least partially to resolve some recent economic anomalies. As a result, GDO
offers a valuable new source of information for households, businesses, researchers, and policymakers
seeking to understand economic issues in real time."
The second new measure, called GDPplus, is an optimally weighted combination of GDP and GDI, with
weights that are allowed to evolve over time.
This measure, which is
available from the Philadelphia Fed, has
some technical advantages over the simple average discussed above. However, while both GDO
and GDPplus improve on using GDP or GDI alone, neither alternative overcomes all the problems with
GDP and GDI, particularly the lag of several months before data on GDP and GDI first become available.
In addition, it can be as long as several years before all the important data revisions are completed,
and forecasts beyond a quarter or two ahead are unreliable. However, GDPplus, unlike GDO, can
be calculated even if only one of GDP or GDI is available.
Thus, the best approach to characterizing how well the economy is performing at a moment in time,
and how well it's likely to do in the future, is to use a measure such as GDPplus in combination
with other windows into the state of the economy such as the unemployment rate, industrial production,
consumption, investment and so on.
This preliminary observations suggest that GDP is a too broad and thus questionable measure of
economic growth. As such it should not be absolutized as the sole metric of the economy growth.
Such usage in many respects simply contradict common sense.In a way the calculation of GDP
became just a complex (and by-and-large counterproductive) ritual not unlike some religious rituals
like calculation of certain dates. That's why we can talk about "Cult of GDP" as a religious phenomena.
It does not necessary correlates with well-being of the people as the term "jobless recovery" implies:
for most working people any period of slow growth is not that different from recession.See
Olivier Vaury, Is GDP
a good measure of economic progress, Post-Autistic Economics Review, issue 20 . Recently there was
an interesting new evidence that suggests that shifting production overseas has inflicted additional
damage on the U.S. economy by creating "phantom GDP"
BusinessWeek's analysis of the import price data
reveals offshoring to low-cost countries is in fact creating "phantom
GDP" -- reported gains in GDP that don't correspond to any actual domestic production.
The only question is the magnitude of the disconnect. "There's something real here, but we don't
know how much," says J. Steven Landefeld, director of the Bureau of Economic Analysis (BEA), which
puts together the GDP figures. Adds Matthew J. Slaughter, an economist at the Amos Tuck School of
Business at Dartmouth College who until last February was on President George W. Bush's Council of
Economic Advisers: "There are potentially big implications. I worry about how pervasive this is."
By BusinessWeek's admittedly rough estimate, offshoring may have created about $66 billion
in phantom GDP gains since 2003 (page 31). That would lower real GDP
today by about half of 1%, which is substantial but not huge. But put another way, $66 billion would
wipe out as much as 40% of the gains in manufacturing output over the same period.
It's important to emphasize the tenuousness of this calculation. In particular, it required
BusinessWeek to make assumptions about the size of the cost savings from offshoring, information
the government doesn't even collect.
GETTING WORSE
As a result, the actual size of phantom GDP could be a lot
larger, or perhaps smaller. This estimate mainly focuses on the shift of manufacturing overseas.
But phantom GDP can be created by the introduction of innovative new imported products or by the
offshoring of research and development, design, and services as well--and there aren't enough data
in those areas to take a stab at a calculation. "As these [low-cost] countries move up the value
chain, the problem becomes worse and worse," says Jerry A. Hausman, a top economist at Massachusetts
Institute of Technology. "You've put your finger on a real problem."
Alternatively, as Landefeld notes, the size of the overstatement could be smaller. One possible
offset: Machinery and high-tech equipment shipped directly to businesses from foreign suppliers may
generate less phantom GDP, just because of the way the numbers are constructed.
... ... ...
Phantom GDP can also be created in import-dependent industries
with fast product cycles, because the import price statistics can't keep up with the rapid pace of
change. And it can happen when foreign suppliers take on tasks such as product design without raising
the price. That's an effective cost cut for the American purchaser, but the folks at the BLS have
no way of picking it up.
The effects of phantom GDP seem to be mostly concentrated in the past
three years, when offshoring has accelerated. Indeed, the first time the term appeared in BusinessWeek was in 2003. Before then, China and India in particular were much smaller
exporters to the U.S.
The one area where phantom GDP may have made an earlier appearance is information technology.
Outsourcing of production to Asia really took hold in the late 1990s, after the Information Technology
Agreement of 1997 sharply cut the duties on IT equipment. "At least a portion of the productivity
improvement in the late 1990s ought to be attributed to falling import prices," says Feenstra of
UC Davis, who along with Slaughter and two other co-authors has been examining this question.
What does phantom GDP mean for policymakers? For one thing, it calls
into question the economic statistics that the Federal Reserve uses to guide monetary policy.
If domestic productivity growth has been overstated for the past few years, that suggests the nation's
long-term sustainable growth rate may be lower than thought, and the Fed may have less leeway to
cut rates.
In terms of trade policy, the new perspective suggests the U.S. may
have a worse competitiveness problem than most people realized. It was easy to downplay
the huge trade deficit as long as it seemed as though domestic growth was strong. But if the import
boom is actually creating only a facade of growth, that's a different story. This lends more credence
to corporate leaders such as CEO John Chambers of Cisco Systems Inc. (CSCO
) who have publicly worried about U.S. competitiveness--and who perhaps coincidentally have been
the ones leading the charge offshore.
In a broader sense, though, the problem with the statistics reveals that the conventional nation-centric
view of the U.S. economy is completely obsolete. Nowadays we live in a world where tightly integrated
supply chains are a reality.
For that reason, Landefeld of the BEA suggests perhaps part of the cost cuts from offshoring are
being appropriately picked up in GDP. In some cases, intangible activities such as R&D and design
of a new product or service take place in the U.S. even though the production work is done overseas.
Then it may make sense for the gains in productivity in the supply chain to be booked to this country.
Says Landefeld: "The companies do own those profits." Still, counters Houseman, "it doesn't represent
a more efficient production of things made in this country."
What Landefeld and Houseman can agree on is that the rush of globalization has brought about a
fundamental change in the U.S. economy. This is why the methods for measuring the economy need to
change, too.
The arguments presented above cast doubt on the usefulness of GDP as the main “pilot” of economic
policy. If the thermometer is wrong, then the policy based on it should be wrong too. Also people are
very adaptable and if some numeric scale became an official goal. people demonstrate tremendous ability
to abuse any numeric scales of measurement both by fraud and by corruption of the initial goals and
purpose of the measurement.
But even if we assume the GDP is a useful metric there are some concerns about the validity of the
official figures: Ronald R. Cooke in his editorial
American GDP
published 01-17-2008 at Financial Sense noted:
In another life (circa 1962), I was an auditor for AT&T. Nothing spectacular. Mostly cash and
property reviews. Then some business process analysis. It was my good fortune to have two older gentlemen
as partners. They graciously decided to teach this green college kid how to be a good auditor. It
was a great learning experience. One of the tricks they taught me was called the “reasonable test”.
If the data under audit was within the parameters of like data from other audits, then it was reasonable
to assume there were no problems of procedure or management. If, on the other hand, the data did
not seem to make sense versus circumstantial criteria, then it would be reasonable to assume further
audit investigation was warranted. This technique of measuring the quality of information has become
a cornerstone of my work ever since.
In early November, 2007, the Commerce Department’s Bureau of Economic Analysis (BEA) announced
the United States had achieved a third quarter Gross Domestic Product (GDP) of 3.9 percent. That
number was later updated to 4.9 percent. Those numbers set off my “reasonable test” alarm. How, I
wondered, with an accelerating rate of inflation and declining economic activity, could the United
States turn in such a stellar performance?
The BEA’s report flunked the reasonable test.
GDP
The BEA reported American GDP in billions of Current Dollars (the money we actually spent for
goods and services) for Q3 2006 and Q3 2007. It also reported this same data adjusted for inflation
using “chained” 2000 dollars. As of December 20, 2007, the quarterly data, using seasonally adjusted
annual rates for the National Domestic accounts, yields the Current-Dollar and “Real” Gross Domestic
Product data shown in the following Table. It shows that annual GDP growth in current dollars grew
from 4.53% in Q1 2007 to 5.30% in Q3 2007. Using inflation adjusted chained 2000 dollars, economic
growth grew from 1.55% in Q1 2007 to 2.84% in Q3. Not bad.
But wait. Does this imply an inflation differential of only 2.46% for Q3? And do we really believe
the inflation differential actually declined from 2.98% in Q1 to 2.46% in Q3? Didn’t the value of
the dollar decline over these three quarters?
GDP in billions
of current dollars
% Change from
year ago quarter
GDP in billions
of chained 2000 dollars
% Change from
year ago quarter
Inflation
Differential
2007q1
13,551.9
4.53%
11,412.6
1.55%
2.98%
2007q2
13,768.8
4.67%
11,520.1
1.89%
2.78%
2007q3
13,970.5
2.84%
2.46%
The BEA’s Price Index for Gross Domestic Purchases (which measured prices paid by U S. residents)
increased by just 1.8% in Q3. By contrast, the Labor Department’s Bureau of Labor Statistics (BLS)
CPI-U inflation index was 2.36% for this same period. Which number is
a better measure of inflation?Can we trust either number?
And to further compound the confusion, the BEA has reported a current dollar gain of 6.0% for
Q3. BUT this is against average GDP for all of 2006, rather than a comparison of Q3 2006 vs. Q3 2007.
Collecting the copious amounts of data used to compute GDP has to be a tedious and sometimes frustrating
job. Unfortunately, sophisticated analysis and hard work does not guarantee credible results. The
BEA’s conclusions appear to be a bit optimistic.
Simple Net GDP Calculation
Pundits frequently ignore current dollar GDP (the total production of goods and services priced
as though they were purchased with current dollars). Instead they use a number that has been adjusted
downward called “Real” GDP that deducts the rate of inflation and makes other adjustments to current
dollar GDP in an attempt to compare GDP from one period, with the GDP for a subsequent period, using
dollars of a constant value .
I dislike the term “Real” GDP. There is nothing sacred about using inflation adjusted dollars
as a measure of economic performance. Current dollar GDP is just as “real” as any other measure of
value and provides a useful way to compare multiple sets of data from period to period. We should
remember. Consumers can not spend inflation adjusted dollars to purchase goods and services. They
can only pay their bills with the money that is actually in their pocket – current dollars. So ..
if we want to adjust current dollar GDP for inflation, then let us do just that … and call it “Net”
GDP. In other words, Net GDP is the percentage increase (or decrease) in current dollar GDP for a
specified period vs. the current dollar GDP of a like prior period, less the rate of inflation from
the prior period to the specified period. In the following example, seasonally adjusted current dollar
GDP increased from $13,266.9 billion in Q3 2006, to 13,970.5 billion in Q3 2007 – an increase of
5.30%. The BLS reported a seasonally adjusted price index increase of 2.36% for these same two periods.
If we subtract the BLS CPI from BEA current dollar GDP, that gives us a net increase in GDP
of 2.94% from Q3 2006 to Q3 2007, - far less than the GDP gain of 4.9% reported by the BEA.
BEA Q3 2007 GDP Growth in Current Dollars from Q3
2006
5.30%
Increase of Q3 2007 GDP vs. Q3 2006 GDP
BLS CPI-U Q3 2006 vs. Q3 2007
2.36%
Deduct Q3 2007 Rate of Inflation
Net GDP
2.94%
Net GDP
If we take the BEA seasonally adjusted quarterly current dollar Gross Domestic Product percent
change for Q3 2007, and compare it with this same data adjusted for chained 2000 dollars, the “inflation”
differential is only 1.1 % even though the BEA price index was 1.8. In addition, note that while
real world food and fuel prices have been going up, the inflation differential has been going down.
How is this possible?
BEA GDP Data
10/29/2007
GDP percent change
based on current dollars
GDP percent change
based on chained 2000 dollars
Inflation Differential
2007q1
4.9
0.6
4.3
2007q2
6.6
3.8
2.8
2007q3
6.0
4.9
1.1
If you go to www.tce.name and click on the
Cultural Economics tab, you will see my essay of the rate of inflation: “CPI: Sophisticated Economic
Theory, Terrible Ethics”. To quote from that essay: “If we use the weighting
and data points from the above factoids to calculate an alternative estimate of CPI (the Consumer
Price Index), we get a very different picture of American inflation from Q3 2006 to Q3 2007. There
is a dramatic increase in food and housing costs. …... Granted.
Accuracy would require the acquisition and analysis of a lot more data than assembled for this
effort. But the large discrepancy suggests something is wrong with either the survey methodology
or the process of analysis. Whereas the BLS reported a CPI increase of 2.36% for this period, the
actual rate of inflation was more like 4.02%.”
Ok. I like my economics simple, uncluttered, and straight. Assuming the credibility of the BEA
current dollar estimates, let’s deduct my alternative CPI from the BEA data to estimate economic
performance.
BEA Q3 2007 vs. Q3 2006 GDP in Current Dollars
5.30%
TCE CPI-U Q3 2007 vs. Q3 2006 Dollar value inflation
4.02%
“Net” increase in Q3 2007 GDP
1.28%
Using this methodology, could one conclude America’s economy posted a modest performance in Q3
2007? And by the way:
which number reflects contemporaneous
comments on the economy:
the 4.9% gain in GDP reported by the BEA, or the above estimate of 1.26%?
... ... ...
Conclusion
GDP is one of the most closely watched economic statistics: It is used by the White House and
Congress to prepare the Federal budget, by the Federal Reserve to formulate monetary policy, by Wall
Street and the media as an indicator of economic activity, and by the business community to prepare
forecasts of production, investment, and employment. Because of its extremely sensitive business
and political ramifications, reported GDP (current or chained) needs to be accurate, unambiguous,
and trustworthy.
And this brings up an interesting point. One of the issues in this election cycle is trust. Can
we trust the information we receive from the Federal Government? Congress? The Administration? Federal
agencies? Aside from outright falsification, and intentional or intrinsic bias, data and information
can be rendered untrustworthy by establishing a misdirected premise for the methodology or by overly
sophisticated manipulation.
Hopefully, we will elect a management team in November that has the ability to review our measurement
objectives and the analytical processes used to achieve them. In other words:
In God We Trust. All others need an occasional audit.
The USSR example suggests that the most dangerous aspect of GDP is "tail wags the dog"
effect --
it implicitly stimulated maladaptive, counter-productive behavior of government and its major economic
agents. The term for the USSR was "phantom GDP" and now it applies to the USA to the full extent possible.
For example offshoring may have created about $66 billion in phantom GDP gains since 2003 . A lot of
phantom GDP was also created in import-dependent industries. Accounting at large multinationals is as
distorted as in the USSR to the extent that some parts of profits are completely fictional (writing
down as research many non-research activities is a one popular trick). The danger amplifies when individual
firms adopt questionable metrics like "maximizing shareholder value" as capitalism is by nature a dynamic
economic force what seeks change and became destructive if corporate goals for such a change are misaligned
with the larger society. In other words "maximizing shareholder value" implicitly presuppose minimizing
societal value and responsibility. One telling example is the emergence of "blockbuster" drags, like
all those cholesterol lowering drags, painkillers and recreational drugs like Viagra in big pharma.
There is also a more generic problem with one dimensional metrics of economic performance that USSR
was first to demonstrate to the world. People are very adaptable and if some numeric scale became an
official goal they demonstrate tremendous ability to abuse this metric both by fraud and by corruption
of controlling organizations defeating the initial goals and purpose of the measurement. So "maximizing
shareholder value" paradoxically might be the best way to destroy any traces of honest accounting and
honest auditors :-).
This interesting phenomena when numbers are bended to provide justification to particular ideology,
which is the USSR was called Lysenkoism, was independently rediscovered in the USA by the name of "numbers
racket".
For decades, governments and central banks have always identified the problems of the
economy as demand problems, even if it was not the case . If there was a crisis or a recession,
governments immediately believed that it must be due to lack of demand, and subsequently decide
that the private sector is not willing or able to fulfill the real demand needs of the economy,
even if there was no real evidence that companies or citizens were investing or consuming less
than what they needed. T he entire premise was that companies were not investing "enough".
Compared to what and decide by whom? Obviously by central planners who benefit from bubbles and
overcapacity but never suffer the consequences.
Governments and central banks never perceive risks of excess supply and even less predict a
bubble. Why? Because most central planners see debt, oversupply, and bubbles as small
collateral damages of a greater good: recover growth at any cost.
Behind the mistake in diagnosis is the obsession to maintain or grow Gross Domestic Product
(GDP) at any cost regardless of the quality of its components. GDP is relatively easy to
inflate. I always explain to my students that GDP is the only economic calculation in which you
add what you spend with what you earn. GDP can be inflated through government spending and with
higher debt-fueled expenditures. Debt is not a problem when it serves its purpose, which is to
finance productive investment and allow the economy to grow, while efficiency, innovation, and
technology allow us to be more productive and receive more and better goods and services at
cheaper prices. It is a virtuous cycle.
The virtuous cycle of credit turns into a vicious cycle of unproductive debt when we
incentivize malinvestment and prevent technology substitution by implementing massive
government stimuli and liquidity injections.
@Chinaman me obsolescent with the disappearance of home-ec from our high schools. Economy
means to economize, to save and to make do. Credit cards in hand, suburban Americans spend
like drunken Irish sailors on shore leave.
BTW Chinaman: Those you apparently consider as deplorable, are the ones who do the actual,
real productive work. Most of the rest of employed Americans are keystrokers and
button-pushers, ordered around by governmental administrators and corporate bureaucrats.
Squatting atop the economic scrotumpole are various types of parasites, include
coupon-clipper sons of riches and those who get their ill-gotten gains from the FIRE sector:
Finance, Insurance and Real Estate speculation.
Note: since the Chinese working class' average wage has been doubling in real terms
every ten years since the CPC took over, I'm assuming you're talking about the victimization
of the American working class only (specially, but not only, the white working class from the
Rust Belt).
Some math.....
From US Census Data...
Total US Population = 331,002,651
Average US Per Capita Income (USD 2019) = $35,977.
From World Odometer
Population of China = 1,442,055,798
Chinese Per Capita Income (USD - 2020) = $10,276
US Population X Per Cap Income = 11.9 USD$(trillions) = 54% of US - GDP
PRC population X Per Cap Income = 14.8 USD$(trillions) = 96% of PRC - GDP
By this metric......
Chinese Main Street GDP is 124% of USA Main Street GDP
This means that 46% of US GDP consists of financial manipulation in the FIRE sector, while
the FIRE sector in China is only 4% of the Chinese economy.
There are two different things here. Trump betrayal of his voters is one thing, but election
fraud is another and is unacceptable no matter what is your opinion about Trump. We should not
mix those two topics.
All our political forms are exhausted and practically nonexistent. Our parliamentary
system and electoral system and our political parties are just as futile as dictatorships are
intolerable. Nothing is left. And this nothing is increasingly aggressive, totalitarian and
omnipresent.
Jacques Ellul, Anarchy and Christianity (1991)
Look at them! Look at them, will you? Behold our politicians' horrible languid maws!; the
courtier-like faces of department managers. They are indeed salesmen, for the very power of
nations is measure in relation to their own mercantile activity.
Jean Cau, Le meutre d'un enfant (1965)
"What's going to happen now?" I was asked earlier today. "Nothing and everything," I
replied. Immigration, largely unchallenged and unscathed (excepting the incidental impact of
COVID-19 on population movement) from four years of Trumpism, will now continue to
accelerate unabated . Zionism will continue to enjoy the expansion of American
institutional and military support, this time with the blood interest of Jared Kushner replaced
with the Jewish
spouses of all three of Biden's children. And the momentary Obama-era delusion of a
post-racial America will continue to dissolve in the reality of the increasing
awareness and importance of race throughout the West, not solely as a result of mass
migration but also of the increasing ubiquity of the ideologies of racial grievance and
revenge. There will, of course, be a dramatic change for the worse in tone and spirit, and some
smaller legislative victories like the
banning of federal anti-racism training will likely soon be reversed. The defeat of Donald
Trump is also hugely demoralizing to many decent American people, and emboldening to their
bitterest enemies. This is to be sorely regretted. But it is in the shared qualities of Trump
and Biden, rather than the election and sham ballots, that the real nature of our political
systems and their future can be perceived. And it is in these shared qualities that our true
problems lie.
Parliamentary electoral democracy is merely a representation of the general system in which
it operates. Slavoj Zizek comments:
At the empirical level, of course, multi-party liberal democracy "represents" -- mirrors,
registers, measures -- the quantitative dispersal of different opinions of the people, what
they think about the proposed programs of the parties and about their candidates, etc.
However, prior to this empirical level and in a much more radical sense, the very form of
multi-party liberal democracy "represents" -- instantiates -- a certain vision of society,
politics, and the role of the individuals in it: politics is organized in parties that
compete through elections to exert control over the state legislative and executive
apparatus, etc. One should always be aware that this frame is never neutral, insofar as it
privileges certain values and practices.
The truth of the system, in terms of its non-negotiable aspects, is thus revealed in the
"values and practices" privileged and ring-fenced under both Trump and Biden. What are these
non-negotiables? Zionism, GloboHomo ideological capitalism and its "woke" leftist correlates,
and the neoliberal promotion of GDP as the benchmark of human success and happiness.
Zionism
Jews have little to fear from a Biden presidency, which is presumably why Haaretz
is
claiming that the "American Jewish vote clinched Biden's victory and Trump's ouster.
American Jews decided the outcome of the U.S. elections." Donald Trump might have been
hailed as the "most pro-Israel President in U.S. history," but Jews are notoriously
unreliable in their partnerships with non-Jewish elites. Fate, it must be said, has not been
kind to those gentile elites that have exhausted their usefulness to Jews. And Trump is
surely exhausted, having spent a busy four years fighting for Jews in Israel and in the United
States. He reversed long-standing US policies on several critical security, diplomatic and
political issues to Israel's favour, including the Iran nuclear accord, the treatment of Israel
at the UN, and the status of Jerusalem and the Golan Heights. In December 2019, he announced
his Executive
Order on Combatting Anti-Semitism , promising to fight "the rise of anti-Semitism and
anti-Semitic incidents in the United States and around the world." One wonders what else he
could possibly have done for these people -- apart from a war with Iran -- a question that
appears to have been answered by Jews with a resounding "Nothing." One can only imagine Trump's
facial expression on seeing Benjamin Netanyahu's
emphatic congratulations to Joe Biden, punctuated with the loving refrain: "I have a
personal, long and warm connection with Joe Biden for nearly 40 years, and I know him to be a
great friend of the State of Israel."
Biden and Harris, replete with their immediate familial ties to Jews, are viewed in Zionist
circles as being at least as reliable as Trump, although not as exuberant and bullish. Biden
has been known as a staunch supporter of Israel throughout his 36 years in the Senate, often
cites his 1973 encounter with then-Prime Minister Golda Meir as "one of the most consequential
meetings" of his life, and has on more than one occasion regaled audiences with a tale about
his father telling him that "You don't need to be a Jew to be a Zionist." While some
modifications are likely in the American approach to Iran, few reversals are expected on
Trump's four years of pro-Israel activism. Biden, for example, has weakly criticized moving the
embassy to Jerusalem but said he would not pull it back to Tel Aviv. Michael Herzog at
Haaretz
describes both Biden and Harris as "traditional Democrats, with a fundamental commitment to
Israel whose roots are in part emotional in nature (in contrast to Obama)."
The change in relationship between America and Israel will be, in meaningful terms,
restricted to the personal. Netanyahu, for all his fawning, is likely to undergo a personal
demotion of sorts, with David Halbfinger of the New York Timespointing out
that we can expect a Biden presidency to diminish Netanyahu's "stature on the global stage and
undercut his argument to restive Israeli voters that he remains their indispensable leader."
Palestinian leaders, probably the best-positioned to offer a perspective on the potential for
an improvement in their condition under the new presidency, have been sombre to say the least.
Hanan Ashrawi, a senior PLO official, responded
to the question if she expected United States policy to continue tilting heavily in Israel's
favor: "I don't think we're so naïve as to see Biden as our savior." Contrast this with
the cheerfulness and confidence of Israel settlers who have grown accustomed to the perennial
nature of American support for Zionism. David Elhayani, head of the Yesha Council, an umbrella
for Jewish settlements in the West Bank,
said the party of the U.S. president ultimately doesn't matter so long as the baseline
commitment to support Israel persists: "Under Obama, we built more [settlement] houses than we
have under Trump I think Biden is a friend of Israel."
The fact that the grassroots of the Democratic Party are
drifting away from Zionism is no more consequential than the fact the grassroots of the
Republican Party wanted major action on immigration reform. The former, like the latter, have
been equally ignored by the real power brokers and influencers. Regardless of the radical
appearance of Democrat-affiliated movements like Black Lives Matter, the fact remains that all
of the leftist aggression and rhetoric of the summer of 2020 has resulted in the putative
election of an establishment Zionist and political pragmatist who is sure to execute a more or
less formulaic neoliberal scheme for government. In one sense, the bland, forgetful, and
familiar Biden, who lacks any hint of genuine or novel ideology and was elected purely as a
symbol of "not Trump," is the fitting response to Trump, who was equally devoid of ideological
sincerity or complexity beyond the symbolism of "not Establishment." And so, while the media
proclaims, as Heraclitus, that "all is in flux," from a different perspective we could argue,
like Parmenides, the opposite -- "there is no motion at all."
GloboHomo
If I retain one abiding, surreal, memory of the Trump presidency in the years ahead it will
be the Don dancing to the Village People in the wake of his numerous drives to legalize
homosexuality in various African backwaters. That the Red State Christians comprising so much
of his base could maintain their self-adopted blind spot on this issue is a remarkable
testament to the power of personality, because no world leader in history has done more in
recent history than Donald Trump to export what E. Michael Jones has so aptly termed "the Gay
Disco" -- the double-barrelled shotgun of unbridled finance capitalism and the superficial
freedom of sexual "liberty." As the pastors and preachers of South Carolina and Texas urged
their huddled congregations to pray for the President, Trump was busy dispatching new
missionaries, like U.S. Ambassador to Germany Richard Grenell, to the corners of the earth in
search of converts to the Church of GloboHomo.
In February 2019, the U.S. embassy indulged in some nostalgia for Weimar when it
flew LGBT activists from across Europe to Berlin for a strategy dinner to plan to push for
decriminalization in places that still outlaw homosexuality -- mostly concentrated in the
Middle East, Africa and the Caribbean. For my part, I can think of many social problems in
these parts of the world, but it really takes a special kind of mind to arrive at the opinion
that one of the most pressing is that they need to become more gay. Grenell, however,
horrified that Iran has the audacity to execute its own convicted homosexual pederasts, was
not to be deterred, and was instrumental in the blackmail of lesser nations, promising they
would be denied
access to terrorism intelligence if they don't legalise homosexuality. All of which has
left the far corners of the American cultural-military empire questioning whether they could
better live with suicide bombers or sodomy.
Against such manoeuvres, Biden's apparent claim to be one half of the "most pro-equality
ticket in history" seems a little overstated. That being said, there's no question that Biden
is going to step up the domestic nature of GloboHomo significantly as soon as he assumes
office. Biden has pledged to sign the Equality Act, thus far opposed by the Trump
administration, within his first 100 days in office, a piece of legislation that will amend
"the Civil Rights Act to prohibit discrimination on the basis of sexual orientation and gender
identity in employment, housing, public accommodations, public education, federal funding,
credit, and the jury system." Biden has pledged to appoint significant numbers of homosexuals
and transsexuals to positions of influence, and has promised to allow transsexuals to join the
military. Experienced in advancing global LGBT+ dogma as part of the Obama-Biden
administration, Biden will also once again take up the global mantle,
expressing his "hopes to reverse Trump's efforts and expand queer rights internationally by
making equality a centrepiece of US diplomacy," and condemning
Poland's "LGBT-free zones." Stunning and brave indeed.
There is a certain sense in the cases of both Trump and Biden that, for all the flamboyance
of their efforts in this area, there is a performative aspect to this politics. I don't get the
impression that either has been especially personally committed to these ideas or actions, but
that, as pragmatic-symbolic politicians, they have been made aware that this is the direction
the broader System is moving in and they should comply and support it. The longevity and
gradual acceleration of these trends, beginning in earnest with the presidency of Bill Clinton,
would suggest a systemic movement underlying, and entirely untethered to, specific political
parties or figures. Throughout the West, and much as with Zionism, GloboHomo, or hedonistic
credit-based capitalism and its sexual correlates more generally, is to be accepted and
promoted as an essential part of the role of neoliberal government. In the context of declining
basic freedoms at home, for example the obvious decline in free speech and the creeping
criminalisation of meaningful dissent against the status quo, the international promotion of
homosexuality and transsexual identities offers a cost-free and PR-friendly method for
increasingly authoritarian neoliberal regimes to posture as crusaders for freedom. The trucker
in Ohio is, logical flaws notwithstanding, and whether he wants it or not, thus assured of his
place in the Land of the Free via his government's emancipation of the gays and transvestites
of Uganda. Engaged politically only at the most superficial level, the masses play along with
this ruse, often in blunt denial, possessing only fragmentary realisations of the fact their
countries are changing around them while the petty "rewards" of Americanism are meagre and
peculiar, if not insulting.
GDP!
Along with frequent reassurances that he was "giving serious consideration" to doing
something, Trump's presidency was marked by regular updates on the performance of American GDP.
Unfortunately the GDP, like the Jewish vote, appears to have stabbed him in the back, with
around 70% of
American GDP represented in counties that (putatively!) voted Democrat. Trump's tragicomic
belief in GDP performance as a form of politics in its own right is perhaps the quintessential
example of the mentality of homo economicus and the tendency of neoliberals to view
countries as mere zones, or economic areas, where everything is based on rationalism and
materialism, and national success is purely a calculation of economic self-interest. Writing
pessimistically of Trump's expected nomination
in 2015 , I issued a stark warning about the influence of Jared Kushner, but also
added:
For all his bluster, Trump is a creation and product of the bourgeois revolution and its
materialistic liberal ideologies. We are teased and tantalized by the fantasy that Trump is a
potential "man of the people." But I cannot escape the impression that he is a utilitarian
and primarily economic character, who seeks a social contract based on personal convenience
and material interest. In his business and political history I see only the "distilled Jewish
spirit."
I don't think I've seen anything over the last four years that has made me question or
revise that assessment. Trump's dedicated tweeting on GDP in fact had the opposite effect.
The disturbing reality, of course, is that GDP is only one side of a national economy.
Another crucial aspect is government borrowing, and current projections suggest that the United
States is " condemned to
eternal debt ." According to The Budget Office of the United States Congress (CBO), "the US
economy would enter the first half of this century with a public debt equivalent to 195 percent
of its GDP. In the next 30 years the debt of the most powerful economy on the planet would more
than double." The first significant jump occurred in the wake of the subprime crisis, in which
Jewish mortgage lenders were especially prominent. The subprime crisis forced public debt to 37
percent of GDP, which then rose steadily to 79 percent between 2008 and the outbreak of
COVID-19. It now stands at 98 percent, and is accelerating. Although the United States has
reached comparable levels of debt in the past, there has almost always been an accompanying
war, or wars, which acted as a financial pressure valve -- a fact that does not bode well for
isolationists but may be encouraging news for Zionist hawks.
Joe Biden has claimed recently that "a
Biden-Harris Administration will not be measured just by the stock market or GDP growth, but by
the extent to which growth is raising the pay, dignity, and economic security of our working
families" -- while at the same time welcoming millions of new immigrants and legalizing the
~20M+ illegals into the workforce .The American economy is in fact extremely unlikely to change
direction, with Biden
reassuring his billionaire donors gathered at the Carlyle Hotel in Manhattan in June 2019
that "no one's standard of living will change, nothing would fundamentally change." I believe
him. Biden was part of an administration that
looked on as 10 million working Americans lost their homes. Matt Stoller at the
Washington Post has described Obama-era Democrat economic policies as "in effect, a
wholesale attack on the American home (the main store of middle-class wealth) in favor of
concentrated financial power." Biden was part of a team that outright rejected prosecuting
major bankers for fraud and money laundering, and that represented one of the most
monopoly-friendly administrations in history:
2015 saw a record wave of mergers and acquisitions, and 2016 was another busy year. In
nearly every sector of the economy, from pharmaceuticals to telecom to Internet platforms to
airlines, power was concentrated. And this administration, like George W. Bush's before it,
did not prosecute a single significant monopoly under Section 2 of the Sherman Act. Instead
[under Obama] the Federal Trade Commission has gone after such villains as music teachers and
ice skating instructors for ostensible anti-competitive behavior. This is very much a
parallel of the financial crisis, as elites operate without legal constraints while the rest
of us toil under an excess of bureaucracy.
Biden is the product of funding from
forty-four billionaires , including six hedge fund speculators, seven real estate barons,
and five in the tech sector. Of the top 22 donors, at least 18 are Jews (Jim Simons, Len
Blavatnik, Stewart Resnick, Eli Broad, Neil Bluhm, David Bonderman, Herb Simon, Daniel Och, Liz
Lefkovsky, Steve Mandel, Bruce Karsh, Howard Marks, S. Daniel Abraham, Marc Lasry, Jonathan
Tisch, Daniel Lubetsky, Laurie Tisch, and Robert Toll). The Jewish consortium behind Biden is
almost identical in its financial composition to that behind Trump which, as I've explained
previously , was notable for its embodiment of "usury and vulture capitalism, bloated
consumerism, and the sordid commercial exploitation of vice." Biden's transition team ,
meanwhile, is comprised of "executives from Lyft, Airbnb, Amazon, Capital One, Booz Allen,
Uber, Visa, and JPMorgan." In short, expectations that Biden is going to break up Big Tech, or
any monopoly for that matter, are the fantasies of the deluded, the ignorant, and the
duped.
Conclusion
While the drama and recrimination surrounding the election are unquestionably fascinating, I
hope you'll forgive for being less agitated than most. My reasons for lethargy are simple: I
knew that regardless of outcome we'd get four more years -- four more years of Zionism,
GloboHomo, and the standardized, rationalized machinery of economic escalation that now
provides the apologetic engine for mass migration. Behind the abortion debates, Supreme Court
picks, culture wars, and media theater, these are the non-negotiables of the System. You don't
hear about them, and you can't talk about them, because you can't vote on them. And this is the
biggest electoral fraud of all.
I feel particular sorrow for ordinary decent Americans, in what today should be the land
of plenty for all, who are having to witness this horrible implosion of their country and
values. Other than divine intervention there is no hope. The media, money markets and
political classes are either directly run by the same children of a devil or by loathsome
gentiles who have taken the Judas coin or who are cowards in fear of their miserable
life's.
What is life if it means cowering down in the face of evil? An ancient voice trying to
tell this strange world that you are controlled by an evil power and that your eternal fate
is determined by how you respond to it i.e. join the freak show or stand up like a true man
or woman and tell them no.
The writer of this essay is a man of culture, with wide interests. There are not many
left. Compare him to the moronic voices of today with their narrow perverted interests and
weep for what faces you.
I feel particular sorrow for ordinary decent Americans, in what today should be the land
of plenty for all, who are having to witness this horrible implosion of their country and
values. Other than divine intervention there is no hope. The media, money markets and
political classes are either directly run by the same children of a devil or by loathsome
gentiles who have taken the Judas coin or who are cowards in fear of their miserable
life's.
Particular particular sorrow for the young. As for divine intervention, we used to have a
saying about God helping those who help themselves. Surely there must be some action we can
take.
While the drama and recrimination surrounding the election are unquestionably
fascinating, I hope you'll forgive for being less agitated than most. My reasons for
lethargy are simple: I knew that regardless of outcome we'd get four more years -- four
more years of Zionism, GloboHomo, and the standardized, rationalized machinery of economic
escalation that now provides the apologetic engine for mass migration. Behind the abortion
debates, Supreme Court picks, culture wars, and media theater, these are the
non-negotiables of the System. You don't hear about them, and you can't talk about them,
because you can't vote on them. And this is the biggest electoral fraud of all.
Exactly correct. As early as mid April 2017 I could see that Trump had no intention of
keeping his promises to middle Americans I wrote a comment to this blog saying as much.
Trump is a minion of the Deep State.
The Deep State doesn't care about the unimportant internecine squabbles of the two
parties as long as their important issues are advanced (wealth and power). As a matter of
fact it strengthens the false perception that there is a choice when voting.
Trump and the Deep State do not care what the American people want. They know that most
American people are inane fools and will believe anything. Most Americans would rather watch
America's Got Talent, Dancing With The Stars or The Masked Singer than be informed about
important issues.
The only discernible values espoused in this rambling crypfic article is dog-whistling to
bigots of yore.
There is no study of history, no analysis, no insight and no meaning beyond blathers about
jews and homos.
The tone is hatred and despair with the judgement that others are to blame and there is
nothing to work towards.
The Zizek quote offered a word-salad refrain that everybody comes to power under some
bias, to themselves, if nothing else. But Zizek's actual point has be de-contextualized. Here
is what Zizek was saying:
//Let's remember that [Hannah] Arendt said this in her polemic against Mao, who himself
believed that "power grows out of the barrel of a gun" – Arendt qualifies this like
an "entirely non-Marxist" conviction and claims that, for Marx, violent outbursts are like
"the labor pangs that precede, but of course do not cause, the event of organic birth."
Basically, I agree with her, but I would add that there never will be a fully peaceful
"democratic" transfer of power without the "birth pangs" of violence: there will always be
moments of tension when the rules of democratic dialogue and changes are suspended.
Today, however, the agent of this tension is the Right, which is why, paradoxically, the
task of the Left is now, as the US politician Alexandria Ocasio-Cortez has pointed out, to
save our "bourgeois" democracy when the liberal center is too weak and indecisive to do it.
Is this in contradiction with the fact that the Left today should move beyond parliamentary
democracy?
No: as Trump demonstrates, the contradiction is in this democratic form itself, so that
the only way to save what is worth saving in liberal democracy is to move beyond it –
and vice versa, when rightist violence is on the rise, the only way to move beyond liberal
democracy is to be more faithful to it than the liberal democrats themselves. This is what
the successful democratic return to power of the Morales's party in Bolivia, one of the few
bright spots in our devastated landscape, clearly signals.//
In other words we must be conservatives who are willing to progress!
And hey, crypto-fascists: Zizek is not on board with you just because RT runs him on their
version of Fox News.
The world is never going back to the old-timey dayz of white settlement of an eden
America. So move forward or croak of old age or both.
As to the idea that "decent Americans" are in any way demoralized by Trump's loss:
BULLSHIT!
If you are demoralized by Trump's loss, you have been ejected from decency. But Luckily
for you, it so happens USA is a happy-enough home for all stripes of perverts.
@Verymuchalive the
Occidental Observer writers in prison, you have zero reason to think Trump won't crack down
on free speech in 2020.
Another 4 years of Trumpstien means a very large % of the right will continue to sleep,
something Biden could not get us to do. Biden could never get the right to support vaccines
or martial law.
No Trump apologist besides Alex Jonestien gives an excuse why Trump is backing a unsafe,
hastily made vaccine for a disease with a 99% survival rate. No Trump cultist will provide a
credible one. (Wally will not be the first)
And what happened? She was raped and kicked in the butt by him. He always does that to
everybody. He did it to his dad, he did it to his brothers and sister, he did it to his
family ..and now he has raped America.
Trump's only ability is to find out what others fear or desire, then overpromise on
everything and deliver nothing or even the opposite after u have given him your support or
money. That's how he operates in business, and that's how he has conducted his fake
presidency.
I am surprised that so many seemingly intelligent people have been taken in by this
well-known conman.
Great article. What I find strange is a businessman from New York second only to Israel in
population of Jews could be so easily duped by them. Loyal only to themselves. In the words
of Harry Truman "Jesus couldn't do anything with them, what am I suppose to do with
them?".
I think it needs to be emphasised that the "homo" in globohomo stands for
"homogeneity" and not "homosexuality":
Globohomo
(adj) A word used to describe a globalized and homogenized culture pushed
for by large companies, politicians, and Neocon/Leftist pawns. This culture includes
metropolitan ideals such as diversity, homosexuality, sexual degeneracy, colorblindness in
regard to race, egalitarianism, money worship, and the erasure of different individual
cultures, among other things.
My reasons for lethargy are simple: I knew that regardless of outcome we'd get four more
years -- four more years of Zionism, GloboHomo, and the standardized, rationalized
machinery of economic escalation that now provides the apologetic engine for mass
migration. Behind the abortion debates, Supreme Court picks, culture wars, and media
theater, these are the non-negotiables of the System. You don't hear about them, and you
can't talk about them, because you can't vote on them.
This may be great for The US' Jewish plutocracy, but the United States is still in
economic competition with countries that don't give 2 cents for ZioGlob world (for example
China – which has just signed the RCEP – Regional Comprehensive Economic
Partnership, covering 15 Asian countries, after 8 years of negotiation and covering 2.2
billion people).
So the rest of the world looks on with interest, same as it did in 1923, when the German
Weimar Republic collapsed in an orgy of sleaze, corruption, debt and worthless money.
990. Jews are the scapegoats for all the deficiencies of low-IQ whites just as whites are
the scapegoats for all the deficiencies of low-IQ non-whites. Let me explain how that
works.
Why do we observe Jews at the forefront of many cutting-edge industries? (for example the
media/arts and financial industries are indeed rife with them). The low-IQ answer is, of
course, a simplistic conspiracy theory: Jews form an evil cabal that created all these
industries from scratch to "destroy culture" (or at least what low-IQ people think is
culture, i.e. some previous, obsolete state of culture, i.e. older, lower culture, i.e.
non-culture). And, to be sure, there is a lot of decadence in these industries. But, in an
advanced civilization, there is a lot of decadence everywhere anyway! It's an essential
prerequisite even! So it makes perfect sense that the most capable people in such a
civilization will also be the most decadent! The stereotype of the degenerate
cocaine-sniffing whoremonging or homosexual Hollywood or Wall Street operative belongs here.
Well, buddy, if YOU were subjected to the stresses and temptations of the Hollywood or Wall
Street lifestyles, maybe you'd be a "degenerate" too! But you lack the IQ for that, so of
course you'll reduce the whole enterprise to a simplistic resentful fairy tale that seems
laughable even to children: a bunch of old bearded Jews gathered round a large table planning
the destruction of civilization! Well I say enough with this childish nonsense! The Jews are
simply some of the smartest and most industrious people around, ergo it makes sense that
they'll be encountered at or near all the peaks of the dominant culture, being
overrepresented everywhere in it, including therefore in its failings and excesses! This is
what it means to be the best! It doesn't mean that you are faultless little angels who can do
no wrong, you brainless corn-fed nitwits! There's a moving passage somewhere in Nietzsche
where he relates that Europe owes the Jews for the highest sage (Spinoza), and the highest
saint (Jesus), and he'd never even heard of Freud or Einstein! In view of all the
immeasurable gifts the Jewish spirit has lavished on humanity, anti-semitism in the coming
world order will be a capital offense, if I have anything to say on the matter. The slightest
word against the Jews, and you're a marked man: I would have not only you, but your entire
extended family wiped out, just to be sure. You think you know what the Devil is, but he's
just the lackey taking my orders. Entire cities razed to the ground (including the entire
Middle East), simply because one person there said something bad about "the Jews", that's how
I would have the future! Enough with this stupid meme! To hell with all of you brainless
subhumans! You've wasted enough of our nervous energy on this stupid shit! And the same goes
to low-IQ non-whites who blame all their troubles on whites! And it's all true: Jews and
whites upped the stakes for everybody by bringing into the world a whole torrent of new
possibilities which your IQ is too low to handle! So whatcha gonna do about it? Are you all
bark, or are you prepared to bite? Come on, let's see what you can do! Any of you fucking
pricks bark, and we'll execute every motherfucking last one of you!
Blah, blah, blah. Cat circling the hot plate. Trump was galacticly stupid. He should have
told the Jews that I will give you Jerusalem and Golan heights in my second term. He would
have a second term.
The only point is here is this:
Jews see Iran as a mortal threat. Jews want Iran to be destroyed. For Biden the first point
on the agenda is destruction of Iran. Biden did promise Jews that he will destroy Iran.
That is why Biden did win.
Trump hesitated with his promise to destroy Iran that is why he lost.
So here is the conclusion question:
Was Biden serious when he promised to Jews destroy Iran, or he was only making fools from
them Jews.
That is the only outstanding question
From my understanding, the term "Globohomo" was originally meant as a shorthand for
"globalised homogenisation", wherein all national cultures would be eliminated in favour of a
universal culture, promotion of homosexuality is just one of the components of GloboHomo,
with things like rampant consumerism, substance use and liberalism being some of the other
things.
If you go to the newly built sections of Europeans cities, you will notice how they are
all the same (homogenous) with the same American fast food outlets and the same architectural
style.
The Jewish consortium behind Biden is almost identical in its financial composition to
that behind Trump which, as I've explained previously, was notable for its embodiment of
"usury and vulture capitalism, bloated consumerism, and the sordid commercial exploitation
of vice."
GDP figures hide rents, and unearned income as if they are GDP gains.
Let's take the housing bubble years up to 2008 as an example. Thought experiment:
Everybody in the West sells their home to their neighbor.
New bank credit was created due to loan formation to buy and sell homes. There was
activity as new finance paper was created in the form of new debt instruments to transfer
your home to your neighbor. All the new interest collected by banks is seen as profit.
GDP goes up by the profits and new finance activity.
The physical housing stock does not change at all.
Hudson and PCR explains how GDP is a false metric for measuring economic activity. People
cannot understand things if they don't have words for it, or if they don't have a way of
measuring.
Clown world is formed purposefully.. rents, unearned income, usury are a feature of the
system, not a bug. It is not you going crazy, you have become Allice in wonderland, where
reality is unreal.
According to official US government economic data, the US economy has been growing for
10.5 years since June of 2009. The reason that the US government can produce this false
conclusion is that costs that are subtrahends from GDP are not included in the measure.
Instead, many costs are counted not as subtractions from growth but as additions to
growth . For example, the penalty interest on a person's credit card balance that results
when a person falls behind his payments is counted as an increase in "financial services" and
as an increase in Gross Domestic Product. The economic world is stood on its head.
In my golden days, I did manufacturing throughput analysis, cost modeled parts, and
reviewed component and transportation distribution. I am curious. Forget all that
neoliberal stuff . . .
Ohh, those golden days
Measurement has its place and is the cornerstone of science, but it is not equal to
pattern recognition. And when applied to social phenomena with their complexity it is
more often a trap, rather then an insight.
You need to understand that.
Deification of questionable metrics is an objective phenomenon that we observe under
neoliberalism.
A classic example of deification of a questionable metric under neoliberalism is the
"cult of GDP" ("If the GDP Is Up, Why Is America Down?") See , for example
For example, many people discuss stagnation of GDP growth in Japan not understanding
here we are talking about the country with shrinking population. And adjusted for this
factor I am not sure that it not higher then in the USA (were it is grossly distorted by
the cancerous growth of FIRE sector).
So while comparing different years for a single country might make some limited sense,
those who blindly compare GDP of different countries (even with PPP adjustment) IMHO
belong to a modern category of economic charlatans. Kind of Lysenkoism, if you wish
That tells you something about primitivism and pseudo-scientific nature of neoliberal
economics.
We also need to remember the "performance reviews travesty" which is such a clear
illustration of "cult of measurement" abuses that it does not it even requires
commentary. Google has abolished numerical ratings in April 2014.
Recently I come across an interesting record of early application of it in AT&T at
Brian W Kernighan book UNIX: A History and a Memoir at late 60th, early as 70th.
When doing GDP-PPP comparisons there is one very important thing your guys do not take into
account at all and that's a given country's infrastructure.
I mean what each and every citizen "own" just because he lives in that country : roads,
highways, schools, hospitals etc etc.
If you take that into account then the US is in a worse shape then many many third world
countries....
I don't have the exact numbers in head right now but for example, having a kid in the US
costs 10s of thousands of USD (like 40 or 50.000 USD) that you have to pay from your own
pocket.
The same thing in Russia costs more like 3-5.000 USD.
In most of the European countries (guess it's the same thing in Russia), if you want to go
to school, you'll have to pay a few hundred USD a year to enroll and that's it (of course you
have to pay for housing and food just like anybody else). Schools are free and payed by the
state, so every citizen "own" them.
If you add up all the things that are private (i.e. that you have to pay for) in the
States, compared to what is just "given" to you, I guess, just with school & healthcare,
you'll end up easily with 1/2 million dollars per citizen (think about old age healthcare...
mamamia, I'm glad I'm not american).
Which means that every Russian is 500.000$ richer that every american at birth...
Then you can start bitching about the few thousand dollars more or less that someone makes
in this or that country...
@ Danny 16
Yah, the "numbers" do not show the quality of life. Rarely mentioned for the US is that half
the adult population makes $30K or less and cannot afford simple emergencies under $500.
Russia now was better maternal survivor rates than the United States. Looks like Canada is
suffering the same problem with homelessness. (Homeless problem will get worse as the US
Supreme Court ruled that the homeless have a right to camp on sidewalks if no shelters. While
maybe compassionate sounding, it removes from local governments the ability to regulate
homeless camps.)
By contrast, around 17% of Americans don't have enough to eat (about 24x higher than the
Russian figure). But, as the US has a larger middle class, we can assume there's a higher
percentage of families there with disposable income beyond essentials.
Erelis , Dec 23 2019 20:58 utc | 47
I agree with you. It's impossible to live in the USA with USD 30,000.00. You're literally a
homeless person if you have that wage level.
Nowadays, you can live in the USA with a USD 50,000.00-60,000.00 household wage. But you
live badly and one cyclical business crisis or minor heath problem away to be completely
bankrupt. And forget about retiring: you'll work until you drop dead.
If you want to consider yourself "middle class" in America, you're probably talking about
USD 120,000.00 household earnings. Hence the term "six figure wage/salary" you hear so often in
the USA: this is a codename for middle class wage. Americans don't like to describe
themselves as a class-based society, for historical reasons that go since its very foundation,
so they avoid the word "class" whenever they can.
To be in the "solid" American middle class, you need to be earning (by household) around USD
300,000.00. That generally means both husband and wife are middle class (i.e. earn the famous
"six-figure"). In that band of earnings, the family is in a secure position and will be able to
send up to two children to a top college. Only a major financial crisis or a catastrophic
health tragedy (one of the breadwinners dying prematurely) would be able to knock this family
out of the middle class.
From USD 720,000.00 up, you're already in the "upper" middle class territory. At this level,
we're probably talking about a household located in downtown New York and Los Angeles, plus
second houses to spend the summer, winter or both. These are the households who have a
participation (albeit minor) on the Wall Street pie, and who get richer and richer (albeit on a
lower pace and smaller scale) as inequality rises. Only a series of very unfortunate events
could knock an upper middle class family off its class. The upper middle class also makes up
most of the Ivy League elites (in number terms) and serve as a genetic reserve for the American
capitalist class (the elite per se), since they are essentially the only
First problem is that in order to be comparable they are converted into the same currency,
typically dollars. That's a problem because things don't cost the same in different
countries. If you want to measure strength of economy you need to measure the purchasing
power based on where the money is spend and not based on the costs of goods and services in
the US (which you inadvertently do when you convert GDP's in US dollar values).
Second problem is that GDP does not measure the 'size' of the economy. It measures how
much money is being pumped around within an economy and how often it is being pumped around
and then the assumption is made that this represents the size of the economy. It's very easy
to artificially increase this pumping around to inflate the apparent size of an 'economy'.
Companies do this routinely before IPO's for example. The perversions we now have
masquerading as stock markets are another. But mostly it is done by creating debt. When you
get a loan, you get money that mostly did not exist prior to you getting it. It's not
backed by anything but the expectation of profits (in the sense that you're expected
to manage to leverage the money into creating at least enough real economic value to back not
just the issue of your loan but also the interest, representing costs for the providers, and
provide your share of the compensation for those loan receivers who fail in this task, ie
provide backing for the previously non-existing money they received).
So in order to get a genuine measure of the economic power of an economy you need to rate
their GDP in terms of local purchasing power which puts Russia equal to Germany. But you also
need to account for the amount of debt in an economy as the money issued as debt for the most
part does not represent actual existing economic value but at best expected economic value
and at worst will not be recouped at all in which case you need to detract it from the GDP
numbers.
That gets far too complicated for most people who just want simple, reassuring numbers,
like comparing economies on GDP numbers based on dollar values. Dream on.
Here are some facts on the Russian economy:
– in 2018 approx. 82% of GDP was spend domestically and only about 18% exported (see
why purchasing power matters?)
– of that 18% exports about a third represented raw materials, so 6% of GDP
– oil and natural gas represented between 35% and 40% percent of raw material exports,
which means between 2% and 2,5% of GDP consisted of oil and gas exports.
– in 2018 Russia achieved a rare economical feat, a triple surplus. The total
government debt (which was only a few percent of GDP) was less than the surpluses on the
government bank accounts meaning there was no net debt. Instead there was a modest net
surplus. The second surplus was the annual government budget. In 2018 Russian government
spending was less than the government revenues that year. And thirdly, they had a trade
surplus, exporting more than they imported.
In case you failed to notice, they exported more than they imported even though only 18%
of GDP consists of exports. Given the other two surpluses they could import a lot more than
that if they wanted to or if they needed to .
They don't because they don't need to. Russia does not depend on the rest of the world to
keep its economy going. It is about as autarkic as it is nowadays possible to be.
(cnbc.com) 139In a speech last week, Fed Chairman Jerome
Powell raised the possibility that the problem is with the data itself. GDP measures the value
of products and services that are bought and sold. But many of the greatest technological
innovations of the internet age are free. Search engines, e-mail, GPS, even Facebook -- the
official economic statistics are
not designed to capture the benefits they generate for businesses and consumers . "Good
decisions require good data, but the data in hand are seldom as good as we would like," Powell
said. Instead, Powell cited recent work by MIT economist Erik Brynjolfsson, one of the leading
academics on the intersection of technology and the economy. In a paper with Avinash Collis of
the National Bureau of Economic Research and Felix Eggers of the University of Groningen in the
Netherlands, the authors conducted massive surveys to estimate the monetary value that users
place on the tools of modern life.
The results? The median user would need about $48 to give up Facebook for one month. The
median price of giving up video streaming services like YouTube for a year is $1,173. To stop
using search engines, consumers would need a median $17,530, making it the most valuable
digital service. The authors also conducted more limited surveys with students in Europe on
other popular platforms. One month of Snapchat was valued at about 2.17 euros. LinkedIn was
just 1.52 euros. But giving up WhatsApp? That would require a whopping 536 euros. Twitter,
however, was valued at zero euros.
In response to a weakening in the yearly growth rate of key economic indicators such as
industrial production and real gross domestic product (GDP)
some commentators have raised
the alarm of the possibility of a recession emerging.
Some
other commentators are dismissive of this arguing that the likelihood of a
recession ahead is not very high given that other important indicators such as consumer outlays
as depicted by the annual growth rate of retail sales and the state of employment appear to be in
good shape (see charts).
Most experts tend to assess the strength of an economy in terms of real gross domestic product
(GDP), which supposedly mirrors the total amount of final goods and services produced.
To calculate a total, several things must be added together.
In order to add
things together, they must have some unit in common. It is not possible, however, to add
refrigerators to cars and shirts to obtain the total amount of final goods.
Since total real output cannot be defined in a meaningful way, obviously it cannot be
quantified. To overcome this problem economists employ total monetary expenditure on goods, which
they divide by an average price of goods. However, is the calculation of an average price possible?
Suppose two transactions are conducted. In the first transaction, one TV set is exchanged for
$1,000. In the second transaction, one shirt is exchanged for $40. The price or the rate of
exchange in the first transaction is $1000/1 TV set. The price in the second transaction is $40/1
shirt. In order to calculate the average price, we must add these two ratios and divide them by 2.
However, $1000/1 TV set cannot be added to $ 40/1 shirt, implying that it is not possible to
establish an average price.
On this Rothbard wrote in
Man, Economy, and State
:
Thus, any concept of average price level involves adding or multiplying quantities of
completely different units of goods, such as butter, hats, sugar, etc., and is therefore
meaningless and illegitimate.
Since GDP is expressed in dollar terms, which are deflated by a dubious price deflator,
it is obvious that the so called real GDP fluctuations mirror fluctuations in the amount of dollars
pumped into the economy.
Hence, various statements by government statisticians regarding the growth rate of the real
economy are nothing more than a reflection of the fluctuations in the growth rate of the money
supply.
Now, once a recession is assessed in terms of real GDP it is not surprising that the
central bank appears to be able to counter the recessionary effects that emerge.
For
instance, by pushing more money into the economy the central bank's actions would appear to be
effective since real GDP will show a positive response to this pumping after a time lag. (Remember
that changes in real GDP reflect changes in money supply).
This means that if the economy can be expressed through indicators such as GDP, then
this will allow the central bank to appear to be able to navigate the economy (i.e., GDP) by means
of a suitable policy mix. In addition, it makes sense to demand that the central bank should
interfere in order to help the economy.
Why Business Cycles Are Recurrent
Even if one were to accept that real GDP is not a fiction and depicts the so-called true economy
there is still a problem as to why recessions are of a recurrent nature. Is it possible that it is
only external shocks that cause this repetitive occurrence of recessions? Surely, there must be a
mechanism here that gives rise to this repetitive occurrence?
In a free market, we could envisage that the economy would be subject to various shocks but it
is difficult to envisage a phenomenon of recurrent boom-bust cycles. According to Rothbard,
Before the Industrial Revolution in approximately the late 18th century, there were no
regularly recurring booms and depressions. There would be a sudden economic crisis whenever some
king made war or confiscated the property of his subjects; but there was no sign of the
peculiarly modern phenomena of general and fairly regular swings in business fortunes, of
expansions and contractions.
1
The boom-bust cycle phenomenon is somehow linked to the modern world. But what is the link? The
source of recurrent recessions turns out to be the alleged "protector" of the economy -- the central
bank itself.
We suggest that the phenomenon of recessions is not about the weakness of the economy as such
but about the liquidation of various activities that sprang up on the back of the loose monetary
policies of the central bank. Here is why.
A loose central bank monetary policy, which results in an expansion of money out of
"thin air" sets in motion an exchange of nothing for something, which amounts to a diversion of
real wealth from wealth-generating activities to non-wealth-generating activities.
In the
process, this diversion weakens wealth generators, and this in turn weakens their ability to grow
the overall pool of real wealth.
The expansion in activities that emerge from the loose monetary policy is what an economic
"boom" (or false economic prosperity) is all about. Note that an increase in the monetary pumping
due to loose monetary policy of the central bank lifts the monetary turnover and hence GDP.
Once this monetary turnover is deflated by the so-called average price index this will manifest
itself in terms of a strengthening in real GDP. Most experts and commentator are likely to proclaim
that the central bank's loose monetary policies were successful in growing the economy.
Once however, the central bank tightens its monetary stance, this slows down the diversion of
real wealth from wealth producers to non-wealth producers. Activities that sprang up on the back of
the previous loose monetary policy are now getting less support from the money supply - they fall
into trouble and an economic bust or recession emerges in terms of the monetary turnover deflated
by the average price index i.e. the growth rate of real GDP comes under downward pressure.
Activities that emerged on the back of previous loose monetary policy cannot now divert real
wealth to support themselves. This is because these activities were never economically viable –
they could not support themselves without the diversion of real wealth to them by means of an
expansion in money supply. Consequently, most of these activities are likely to perish or barely
survive.
Could these activities escape the consequences of a bust if they are well managed and have solid
appearance? For instance, as a result of the loose monetary stance on the part of the Fed various
activities emerge to accommodate the demand for goods and services of the first receivers of newly
injected money.
Now, even if these activities are well managed, and maintain very efficient inventory control,
this fact cannot be of much help once the central bank reverses its loose monetary stance. These
activities are the product of the loose monetary stance of the central bank and they were never
approved by the market as such. They emerged on account of the increase in money supply, which gave
rise to an increased demand for goods.
Once the central bank monetary stance is reversed, regardless of efficient inventory
management, these activities will come under pressure and run the risk of being liquidated. The
supply of real savings is not large enough to support these activities.
From what was said we could conclude that recessions are about the liquidation of economic
activities that emerged on the back of the loose monetary policy of the central bank . This
recessionary process is set in motion when the central bank reverses its earlier loose stance. Note
that recession is good news for wealth generators since less real wealth is now being taken from
them.
This means that central bank's ongoing policies that are aimed at mitigating the
consequences that arise from its earlier attempts at stabilizing the so-called economy, i.e., real
GDP, are key factors behind the repetitive boom-bust cycles.
Because of the variable time
lags from changes in money to changes in prices and changes in real GDP, Fed policy makers are
confronted with economic data that could be in conflict with the Fed's targets. Hence, this forces
central bank officials to respond to the effects of their own previous monetary policies.
Note that Fed policymakers regard themselves as being responsible to bring the so-called economy
onto a path of stable economic growth and stable price inflation. Consequently, any deviation from
the stable growth path as outlined by policy makers sets the Fed's response in terms of either
tighter or looser stance. These responses to the effects of past policies give rise to fluctuations
in the growth rate of the money supply and in turn to recurrent boom-bust cycles.
In fact, the downtrend in the yearly growth rate in the adjusted money supply (AMS) during 2002
to 2007 was responsible for the economic slump of 2008. An uptrend in the growth rate of AMS during
2008 to 2011 provided a support for the strengthening in economic activity until very recently. A
visible decline in the annual growth rate in AMS since 2012 has set in motion an economic slump.
This slump is likely to strengthen as time goes by.
Even if the Fed were to lift aggressively its monetary pumping it will not be possible
to reverse the downtrend in the AMS growth rate instantly.
The state of the pool of real
wealth is going to determine the severity of the downturn. We suggest that prolonged reckless
monetary and fiscal policies have likely severely undermined the process of real wealth generation.
This in turn raises the likelihood that the pool of real wealth is hardly growing. Consequently, it
will not surprise us that the likely emerging economic downturn is going to be quite severe by most
historical standards.
It is now popular to blame the policies of the US President Trump in particular his
trade war with China as the key factor behind a possible recession ahead.
While President
Trump's policies are not in the spirit of the free market, we suggest that the downtrend in the AMS
annual growth rate since 2012 has nothing to do with President Trump's policies but with the
policies of the Fed.
Conclusions
Recessions, which are set in motion by a tight monetary stance of the central bank, are
about the liquidations of activities that sprang up on the back of the previous loose monetary
policies.
Rather than paying attention to the so-called strength of real GDP to ascertain
where the economy is heading, it will be more helpful to pay attention to the growth rate of the
money supply.
By following the growth rate of the money supply, one can ascertain the pace of damage to the
real economy that central bank policies inflict. Thus, the increase in the growth momentum of money
should mean that the pace of wealth destruction is intensifying. Conversely, a fall in the growth
momentum of money should mean that the pace of wealth destruction is weakening.
Real GDP growth rate does not measure the real strength of an economy but rather
reflects monetary turnover adjusted by a dubious statistic called the price deflator.
Obviously then the more money is pumped, all other things being equal, the stronger the economy
appears to be. In this framework of thinking one is not surprised that the Fed can "drive" the
economy since by means of monetary pumping the central bank can influence the GDP growth rate. By
means of the real GDP statistic Fed policy makers and government officials can create an illusion
that they can grow the economy. In reality the policy of intervention of the Fed and the government
can only deepen the economic impoverishment by weakening wealth generators.
It now seems to be the consensus that the key factor behind a possible recession ahead
would be the policies of the US President Trump
in particular his trade war with China as.
However we suggest that a key cause behind the possible recession had already been set in motion by
the downtrend in the AMS annual growth rate since 2012.
This downtrend has nothing
to do with President Trump's current policies but with the past policies of the Fed.
"Real GDP growth rate does not
measure the real strength of an
economy but rather reflects monetary
turnover adjusted by a dubious
statistic called the price
deflator."
The above
quoted from the authors post , and
below the definition of the price
deflator. We all know the Fed is the
primary inflator.
"What Is the GDP Price
Deflator? The GDP price deflator
measures the changes in prices for
all of the goods and services
produced in an economy. Gross
domestic product or GDP represents
the total output of good and
services. However, as GDP rises and
falls,
the metric doesn't
consider the impact of inflation or
rising prices on the GDP results.
The GDP deflator shows the extent of
price changes on GDP by first
establishing a base year, and
secondly, comparing current prices
to prices in the base year. The GDP
deflator shows how much a change in
GDP relies on changes in the price
level. The GDP price deflator is
also known as the GDP deflator or
the implicit price deflator."
John Williams of Shadowstats wrote about the GDP almost 20 years
ago. What he had to say was this:
The U.S. government has been
throwing in upward growth biases into GDP modeling ever since the
early 1980s, which have rendered this important series nearly
worthless as an indicator of economic activity and reality. As a
consequence, the distortions from bad GDP reporting have major
impact within the financial system.
"With reported growth moving up and away from economic reality,
the primary significance of GDP reporting now is as a political
propaganda tool and as a cheerleading prop for Pollyannaish
analysts on Wall Street".
Basically to say: trash anything you see about U.S. GDP
figures. It's not real world.
Don't forget all the borrowed money spent into the economy which
is measured as GDP . On the micro level it looks like this : I
made $100k last year in wages and spent all of it. I also spent
$50k with Credit Cards. Of which I still carry that debt. I have a
personal GDP of $150K ...isn't that a neat trick ?
Simply put, "money-pumping" is equivalent to credit creation and
ultimately is the creation of usury based debt, which is of
course, impossible to repay. It is the means to an end, and that
'end' is worldwide slavery.
The money printing creates a fake GDP. The GDP is adjusted for
inflation, measured by CPI. However, the CPI is much higher for
everything people buy: housing (prices and rent), health care,
education, food and transportation.
The CPI published if fake to
control government entitlements adjustments. Therefore, from the
nominal GDP they subtract less inflation and the GDP seems
higher.
If the real inflation would be used, the GDP would have been
negative for the past 10 years - economy in contraction. That is
what people on main street experience - continuing depression.
I am all for the ending of the Fed, the income tax and fiat
currency -and the sooner the better.
However, we still need to
address the problem with capitalism that eventually a tiny few own
all the assets.
In the 1870-1910 period, the US experienced a lot of the same
problems we see today: massive income and wealth inequality,
political fighting over immigration, tariffs, monopolies/
anti-trust and taxation. As a result, several significant changes
came to the country: the creation of the Fed, the income tax,
social security, new tariffs, anti trust legislation, New Deal. I
would argue that many of these things came in response to the
problems of the day. It's important to note that all of these
problems occurred in a free market capitalist system before the
Fed, income tax, etc came into existence!
I believe the system needs a debt and asset reset like the
Jubilee called for in the Bible.
Each boom and bust cycle is purposefully designed to make the
banks and the Fed more powerful and helps destroy America's middle
class. That's been the plan for decades. Besides big government,
the Fed is a foreign enemy and privately owned institution that
wants to destroy America from within. It's not China, it's not
Russia, it's not Iran or Venezuela. It's the Fed that gets more
powerful every time more debt is issued. Their plan is inequality
with a two tier system in order to get rid of the middle class.
This is their banking manifesto. It's all there. How they planned
the great depression and how this foreign entity controls politics
through money corruption by debt.
In the real estate boom, new money pours into the economy from
mortgage lending, fuelling a boom in the real economy, which feeds
back into the real estate boom.
The Japanese real estate boom of the 1980s was so excessive the
people even commented on the "excess money", and everyone enjoyed
spending that excess money in the economy.
In the real estate bust, debt repayments to banks destroy money
and push the economy towards debt deflation (a shrinking money
supply).
Japan has been like this for thirty years as they pay back the
debts from their 1980s excesses, it's called a balance sheet
recession.
GDP is as misleading as average income & unemployment rate used by
economists and policy makers to manipulate the crowd in order to
enrich and reward themselves.
Fun with numbers. Recently I discussed the falsity of stated GDP since it counts transactions
that ought not to be counted as additions but rather as subtractions. I'd like to take this a
step further with GDP/capita, which is about $61,000/yr within the Outlaw US Empire. Yes, as
previously discussed, that figure's overstated due to the errors in GDP accounting. But
there's another realm that must be considered and that the fact that the
3 richest people within the USA own more wealth than the bottom 50% combined, or more
than 160 million people. In other words, the income disparity is so skewed in favor of just
those 3 that there's no possible way GDP per capita can be $61,000/yr.
Here annual personal
median income for USA is cited as $31,099 in 2016, well below the stated
$57,467 GDP/capita for that year. Clearly, the economic position of the USA in contrast to
other nations is much worse that depicted just as are the statistics provided by the USG to
show the economy isn't as bad as it is actually.
@d dan What people
have to understand is the the 2.1% GDP growth is "paper" growth. Every stock bought or sold
is a "service" for the purposes of GDP growth. Trumps corporate tax cuts were supposed to
allow companies to invest in R&D, and re-open manufacturing plants. What has happened is
a massive stock buyback by corporations, which artificially inflates stock value, as well as
artificially increases the GDP. This is not to say that China's 6.1% growth does not include
a sizeable chunk of "paper" GDP growth. Even if it were equal to the US's entire 2.1% GDP
growth, it would still be 3times as large.
"... “Any US claims to economic stability – the stock market is roaring like a chained tiger, unemployment is at near-record lows – must be balanced against the fact that the country owes its entire GDP plus a considerable amount in accumulated debt. ..."
“Any US claims to economic stability – the stock market is roaring like a chained tiger, unemployment is at near-record
lows – must be balanced against the fact that the country owes its entire GDP plus a considerable amount in accumulated debt.
And growing, if the source is reliable, at 36% faster than the US economy.”
A large part of the US GDP is FIRE business and that alone makes the USA GDP fake metric of
economic growth. .
Notable quotes:
"... The conclusion was that the US GDP was something between $5 to $10 trillion instead of $15 trillion as officially reported by the USG . We assume that the official data, especially economic, released by governments is fake, cooked or distorted in some degree. ..."
As you can see from the soon collapse of the western financial system, the valuation
metrics that we have looked to for stability and "the truth" have been mostly fake and
gamed.
Inflation, currency supply, housing data, economic growth or lack thereof, all of these
data points are manipulated, faked and gamed. Just like the Soviet Union was known in the
West to be "faking" their econ data, so too is the west engaged in the same practice.
For example, several years ago Dagong, the Chinese ratings agency, published a report
analyzing the physical economy of the States comparing it with those of China, Germany and
Japan.
The conclusion was that the US GDP was something between $5 to $10 trillion instead of
$15 trillion as officially reported by the USG . We assume that the official data,
especially economic, released by governments is fake, cooked or distorted in some
degree.
Historically it is well known that the former Soviet Union was making up fake statistics
years before its collapse. Western as well as other countries are making up their numbers
today to conceal their real state of affairs.
We are sure that many people out there can find government statistics in their own
countries that by their own personal experience are hard to believe or are so optimistic
that may belong to a different country.
Well, the old boys are back at their old tricks again.
FASAB 56 has made government financial reporting unreliable. They can hide financial
statements. It gives them the right to move around money to hide where money is spent or not
report spending at all. I think they used it's loop holes to hide the 17 trillion in drug
money.
FASAB is a dream come true for Bank money laundering and embezzlers. The Fed is a joke all
these Bank are crooked the way things are set up they can say what ever they want and just
screw Nations of the world. End the Fed go to MMT Hybrid system for the sake of the living
now, each Nation with it's Own money.
"... To extract meaning from GDP trends we have to break it into its components: consumption, investment, government spending, the trade balance. Consumption is by far the largest of these, and the main driver of the economy, but its level is precariously underpinned by unsecured private debt. It is broadly accepted that real investment (in new productive capacity) is dismally inadequate for the continued growth of a modern economy; much of what does take place goes into buying paper assets. ..."
"... focusing on GDP is even more absurd than "prioritising short-term growth over long-term sustainability". ..."
"... a passage spells out the absurdity: "Anything that causes economic activity of any kind, whether good or bad, adds to GDP. An oil spill, for example, increases GDP because of the cost of cleaning it up: the bigger the spill, the better it is for GDP." ..."
"... He goes on and finally shows that "after a country's GDP per capita reaches a moderate level there is no correlation between the wealth of a country and the reported happiness of its population". ..."
As an economist I endorse Dan Button's article ( Stop
obsessing about GDP: we should focus on wellbeing , 11 June). The most we can say is that a
succession of GDP figures over months should indicate whether the economy is growing or moving
into recession. Also aggregate GDP statistics tell us nothing about how national wealth and
income are distributed: globalisation in recent decades has increased the size of the cake, but
the main beneficiaries have been the already better-off.
To extract meaning from GDP trends we have to break it into its components: consumption,
investment, government spending, the trade balance. Consumption is by far the largest of these,
and the main driver of the economy, but its level is precariously underpinned by unsecured
private debt. It is broadly accepted that real investment (in new productive capacity) is
dismally inadequate for the continued growth of a modern economy; much of what does take place
goes into buying paper assets.
As for government expenditure, most of us are crying out for more on education, health,
social care, police, early childhood services, to name a few, but as a nation we want "big
state" levels of public services financed by "small state" levels of taxation. Last, we have a
massive balance-of-payments deficit: we are exporting too little to pay for our imports; we are
living beyond our means. We can only continue this by selling capital assets (such as water
companies) to overseas investors, thus losing the dividends and tax revenue that they
generate.
Lawrence Lockhart Bath
• Spot on, Dan Button. But focusing on GDP is even more absurd than "prioritising
short-term growth over long-term sustainability". In Jeremy Lent's The Patterning Instinct (a
magnificent book
recently recommended by George Monbiot ) a passage spells out the absurdity: "Anything that
causes economic activity of any kind, whether good or bad, adds to GDP. An oil spill, for
example, increases GDP because of the cost of cleaning it up: the bigger the spill, the better
it is for GDP."
He goes on and finally shows that "after a country's GDP per capita reaches a moderate level
there is no correlation between the wealth of a country and the reported happiness of its
population".
Trouble is, this is hard for free-market "wealth creators" to swallow and, as Lent
observes: "the mainstream media unquestionably accept the mantra of our locked-in ideology that
economic growth, measured by GDP, is the social objective to be pursued above all else". So
well done Dan Button and the Guardian for questioning the mantra. Keep it up.
John Airs Liverpool
• Although the measurement of "personal wellbeing" introduced by David Cameron's
government in 2010 is a welcome addition to crude GDP measures, it relies heavily on subjective
assessments of life satisfaction, personal happiness, perception of financial situation, level
of anxiety and a strange "worthwhile rating". It would be more useful to measure the wellbeing
of society as a whole using objective criteria.
These could include, along with GDP per head, medical factors such as infant mortality,
longevity, incidence of mental illness, numbers of doctors per head and access to hospitals;
social factors such as crime rates, percentage of population in prison, stability of marriages
and partnerships, working hours, holidays, homelessness and unemployment; cultural factors such
as human rights and access to the arts; and environmental factors such as pollution and carbon
footprint.
Such a measure, if internationally agreed, could be used to rate the success or otherwise
over time of governments, and to compare wellbeing between countries.
Peter Wrigley Birstall, West Yorkshire
• It is increasingly accepted that continued economic growth is a short route to
eventual disaster for anyone not protected by high wealth: the decline in biodiversity, global
heating, air pollution, water stress, soil deterioration and rising sea levels are all trends
directly linked to the increase in the amount of the natural world's resources going to fuel
consumption. The only way we can protect the mass of human populations is to abandon economic
growth altogether and concentrate on better using what we have. This will include changing the
numerous ways in which human societies channel the profits of economic activity into the
pockets of a few, and challenging the immense pressure exerted by those few on governments
whether democratic or other.
Jeremy Cushing
The politics of economic growth are complex and contested as never before. In rich
countries, rates of GDP growth have declined, decade after decade since the 1960s. The 2008
crash was deep, and the post-crisis recovery has been slow. This poses problems for
governments, given that their 'performance legitimacy' requires some degree of popular approval
of their perceived success in charting a growth path that satisfies the citizenry's demand for
goods and services. Where growth is low and governments choose to respond with austerity
programmes, these bring additional misery and hardship -- including tens of thousands of
premature deaths
in Britain alone .
In the same decades, growth scepticism has thrived. It takes two main forms: one highlights
the impact of infinite growth on finite resources and on the natural environment. Recognition
of the dangers of climate breakdown has transformed this debate – while mainstream
opinion retains the traditional faith in growth, now refashioned as ' green growth ', the heretics are
rallying to ' degrowth '.
The other emphasises the disconnect between growth and social well-being. The days are long
gone when growth was seen as the fast track to general prosperity, as normal and natural as
sunrise. It is well established that the
relationship between growth and well-being is partial at best. Such a correlation does exist,
but weakens after a certain point -- roughly speaking when per capita GDP exceeds $15,000. At
higher levels, the translation of growth into improvements in health and well-being is tenuous.
Other variables, notably levels of equality, are critical.
In combination, these developments have motivated the '
Beyond GDP ' agenda. Whether for reasons of growth scepticism or out of concern that if GDP
growth remains slack governments' performance legitimacy will suffer too, political leaders,
civil servants and academics -- among them
Nicolas Sarkozy , Jacinda Ardern ,
Gus O'Donnell , Joseph Stiglitz and Amartya Sen -- are promoting alternative
yardsticks.
To assess these debates it helps to dig into the history and morphology of the 'growth
paradigm' -- the belief that economic growth is good, imperative, essentially limitless, and
the principal remedy for a litany of social problems – and ask the following: when and
how did this paradigm originate?
From Rain Dance to Nasdaq
One response was offered in 1960 by Elias Canetti. In
quasi-Nietzschean vein, he invoked a transhistorical 'will to grow'. Humans are always striving
for more . Whether the parent monitoring her child's weight or the state official
seeking to augment her power, or the community expanding its population, we all want growth.
The desire to accumulate goods, the drive for economic growth, the wish for prosperity –
they are all innate to human social being. Humans in groups are driven to seek increase: of
their numbers, of the conditions of production, and of the products they require and desire.
The very earliest homo sapiens sought the enlargement of their "own horde through a plentiful
supply of children." And later, in the age of modern industrial production, the growth drive
came into its own.
"If there is now one faith, it is faith in production, the modern frenzy of increase; and
all the peoples of the world are succumbing to it one after the other. Every factory is a unit
serving the same cult. What is new is the acceleration of the process. What in former days was
generation and increase of expectancy, directed towards rain or corn, has today become
production itself." A straight line runs from the rain dance to the Nasdaq.
But this is to confuse the wiring of our current economy with the wiring of the human brain.
Canetti's 'will to grow' doesn't withstand scrutiny. The diverse behaviours he describes can't
be reduced to a single logic. The 'will' behind creating babies is quite unlike the will to
accumulate acreage or gold. And the latter is relatively recent. For much of the human story,
societies were nomadic or semi-nomadic, and organised in immediate-return systems .
Stashes of food were set aside to tide the group over for days or weeks, but long-term storage
was impractical. The accumulation of possessions would hamper mobility. The measures that such
societies used to reduce the risks of scarcity centred not on accumulating stores of goods but
on knowledge of the environment, and interpersonal relationships (borrowing, sharing, and so
on). The moral economy of sharing necessitates a muscular egalitarianism that is undermined by
the accumulation of property.
Logics of accumulation -- and, in the loosest sense, growth -- were not initiated until the
Neolithic revolution. Its technological and institutional transformations included settled
agriculture and storage, class division, states, warfare and territoriality, and, later, the
invention of money. Population growth joined with class exploitation and interstate competition
to expand the sway of agrarian empires. Farmers enlarged the ploughlands, scholars penned
proposals for improving the organisation of agriculture or trade, merchants amassed wealth, and
rulers, seeking to enlarge population and tribute, extended their domains. Only now -- in the
post-Neolithic age -- did gold achieve its
fetish quality as the source and symbol of power.
Scour the documents from ancient civilisations and you'll find tales of competition for
territory and the accumulation of property, but nothing that resembles the modern growth
paradigm. No conception of 'an economy' that can grow, still less of one that tends to the
infinite. And you'll find little, if any, notion of linear historical progress. Instead,
cyclical cosmologies prevailed. A partial exception is the fourteenth century polymath,
Ibn
Khaldun . He developed a sophisticated analysis of growth dynamics. But his ideas weren't
widely adopted, and his theory is cyclical: it describes negative feedback mechanisms that
ensure any economic upticks will necessarily hit barriers and retreat.
When, then, did the modern growth paradigm originate -- and why?
Petty's Arithmetic
The evolution of the growth paradigm was integrally connected to the capitalist system and
its colonial thrusts. The basic link between the growth drive and capitalism is transparent.
The latter is a system of competitive accumulation. The former, in suggesting that the system
is natural and brings benefit also to the '99%', provides ideological cover in that growth
serves as an idealised and democratised redescription of capital accumulation. But there's more
to it than that. The capitalist transition was to a system of generalised commodity production,
in which formal 'productive' economic activity takes the shape of commodities interacting
through the price mechanism, in a regularised manner. If earlier political-economic thought had
construed its subject as the affairs of the royal household, during the capitalist transition a
new model emerged, with an interconnected market field posited as essentially outside the
state.
In seventeenth-century England, just as the universe was being re-imagined by Newton et al
as a machine determined by lawful regularities, the idea that economic
behaviour follows natural laws became commonplace. By the close of the following century,
Richard Cantillon had presented the market system as self-equilibrating, a machine that
functions in a law-like manner; Quesnay's Tableau had depicted the economic system as a
unified process of reproduction; Adam Smith had theorised the dynamics of economic growth; and
philosophers (such as William Paley) had developed the creed that steady
economic growth legitimates the social system and renders system-critical demands
unnecessary and dangerous.
The same centuries experienced a revolution in statistics. In the England of 1600, the
growth paradigm could scarcely have existed. No one knew the nation's income, or even its
territory or population. By 1700
all these had been calculated , at least in some rough measure, and as new data arrived
England's 'material progress' could be charted. Simultaneously, the usage of 'growth' had
extended from the natural and concrete toward abstract phenomena: the growth of England's
colonies in Virginia and Barbados, the ' growth
of trade ,' and suchlike.
But the capitalist transition revolutionised much more than the formal economy and economic
concepts. As land came to be regarded as a commodity-like object, the idea -- found to some
degree in antiquity -- that nature exists to serve the purposes of landowners and is
fundamentally external to human beings, gained definition. The early-modern regimes of
abstract social labour
and
abstract social nature (i.e. the constitution of labour and nature as commodities) were
sustained by the scientific revolution, and also by the construction of capitalist time .
Over centuries, time became flattened into an abstract, infinite and divisible continuum, one
that permitted economic life to be re-imagined as subject to continuous
growth and cultivation . Morality was upended, too, most significantly in the discarding of
the age-old proscriptions against acquisitiveness.
The more that economic activity came to be marshalled behind the imperatives of capital
accumulation, the more it became subject to regimes of 'improvement' and quantification. In
Jacobean and Cromwellian England, these practices and discourses proliferated.
Agrarian-capitalist improvement was fuelled by scientific discoveries. These, in turn, were
spurred on by the navigational and martial demands of explorers, freebooters and conquerors.
European settlers in the New World not only exterminated and subjugated 'new' peoples, but
turned to objectifying and cataloguing them, drawing comparisons with their own kind and
'improving' them. 'Improvement' and its theologically-intoxicated transplantation to colonial
locations generated new data and new demands for detailed knowledge. How profitable is this
tract of land, and its denizens? How can
they be made more profitable ? Answering such questions was enabled by modern accounting
techniques, with their sharper definition of such abstractions as profit and capital.
No surprise, then, that the first statistically rigorous accounting of the wealth of a
country (as distinct from, say, a royal household) was conducted by a capitalist on a
colonial mission . William Petty planted quantification at the heart of scientific
economics, crafted to the purposes of English merchants and empire, and gaining ideological
force from the sheen of objectivity with which economic statistics -- or 'political arithmetic'
as he termed it -- comes coated. In his work the conquest of nature and the idea of nature as a
machine, and of the economy as a productive engine, blended to produce a new concept of wealth
as " resources and the productive power
to harness them " in contrast to the mercantilist concept, centred on the accumulation of
bullion.
Colonisation of the New World contributed powerfully to capital accumulation in Western
Europe, but it also spurred Europe's philosophers to elaborate a racialised progress ideology .
The question of what to make of the peoples encountered in the Americas, and what implications
followed from their property arrangements, stimulated a new reading of the human story: a
narrative of social progress. From the vantage point of the colonialists, if 'they' were at the
primitive stage, had 'we' once occupied it too?
Centred on a mythical ladder that climbs up from barbarism to civilisation, the progress
idea hammered the diversity of human populations into a single temporal-economic chain .
By indexing the richer and higher-tech nations (and 'races') as history's vanguard, it
justified their bossing of the rest. It was a manifesto that drummed out capital's rhythms, and
later found new forms as ' modernisation theory ,' 'the development project,'
and so forth, articulated through a grammar of 'growth.' Through its marriage to progress and
development, in the belief that social advance requires a steady upward ratchet in national
income, growth gained its ideological heft.
The Globalisation of an Ideology
In the nineteenth and twentieth centuries, the consolidation and globalisation of capitalist
relations was accompanied by the growth paradigm. The first half of the twentieth century saw
its definition sharpen. A pronounced shift occurred from a rather vague sense -- long prevalent
-- that government should preside over economic 'improvement' and 'material progress' to an
urgent conviction that promoting growth is a matter of national priority. Factors behind the
shift included intensified geopolitical rivalry, and the increasing 'muscularity' of states,
with their expanded bureaucratic apparatuses, surveillance systems and welfare provision, as
well as the segue from the age of empires to that
of nation states , a shift that helped consolidate the discourse of the 'national economy.'
In many countries the expansion of suffrage was an additional factor: rights were extended and
an infrastructure and ideology of national belonging was constructed with the aim of
incorporating the lower orders as citizens into the body politic. With the Great Depression,
restoring growth became an urgent project of states, and provided the context for the national
income accounting that eventually led to GDP.
The acme of the growth paradigm was reached in the mid twentieth century. Growth was firmly
established everywhere: in the state-capitalist economies of the 'Second World,' the market
economies of the West, and the postcolonial world too. It became part of the economic-cultural
furniture, and played a decisive part in binding 'civil society' into capitalist hegemonic
structures -- with social democratic parties and trade unions crucial binding agents. It came
to be seen as the key metric of national progress and as a magic wand to achieve all sorts of
goals: to abolish the danger of returning to depression, to sweeten class antagonisms, to
reduce the gap between 'developed' and 'developing' countries, to carve a path to international
recognition, and so on. There was a military angle too. For the Cold War rivals, growth
promised geopolitical success. "If we lack a first-rate growing economy," cautioned JFK on the
campaign trail, "
we cannot maintain a first-rate defense ." The greater the rate of growth, it was
universally supposed, the lesser the economic, social and political challenges, and the more
secure the regime.
The growth paradigm, I suggest, is a form of fetishistic consciousness. It functions as
commodity fetishism at one remove. Growth, although the result of social relations among
people, assumes the veneer of objective necessity. The growth paradigm elides the exploitative
process of accumulation, portraying it instead as a process in the general interest. As
Mike Kidron and Elana
Gluckstein note, as a system of competition "capitalism depends on the growth of capital;
as a class system it depends on obscuring the sources of that growth."
For a long time, GDP growth was widely assumed to be the route to prosperity. Since then,
cracks have appeared. In the rich world, we are beginning to realise that continuous GDP growth
leads not simply to wealth and wellbeing, but to environmental collapse and barbecued
grandchildren. But growth is not its own cause. GDP mirrors the power structure and form of
value of capitalist society, but it doesn't define the system's core goal. That goal is the
competitive accumulation of capital, and the accounting principles that guide it are those at
the level of the firm, not the state. Put differently, the relentless increase in global
resource throughput and environmental despoliation is not principally the result of states
aspiring to a metric – higher GDP – but of industrial and financial firms, driven
by market competition to expand turnover, develop new products, and increase profits and
interest.
If the above analysis is correct, insofar as critical debates on growth focus solely on GDP
while being coy about capital, they are enacting a form of displacement .
In writing a dissertation in 2014 I read Alchian's theory of the firm where he said
cooperation is what fosters a peaceful condition for growth to occur, where as competition
does the opposite. I've lived by that idea since, at least for us here in Lagos we have a
chance to build a more cooperative and less competitive society
If we were actually pursuing growth things would be a lot better.
The current goal is making money (capital accumulation).
What is this GDP thing anyway?
In the 1930s, they pondered over where all that wealth had gone to in 1929 and realised
inflating asset prices doesn't create real wealth, they came up with the GDP measure to track
real wealth creation in the economy.
The transfer of existing assets, like stocks and real estate, doesn't create real wealth
and therefore does not add to GDP. The real wealth creation in the economy is measured by
GDP.
Inflated asset prices aren't real wealth, and this can disappear almost over-night, as it
did in 1929 and 2008.
The economics of globalisation precedes the GDP measure when they thought inflating asset
prices created real wealth.
Real wealth creation involves real work, producing new goods and services in the
economy.
We need an economics that focuses on GDP to grow GDP.
Neoclassical economics makes you think you are creating real wealth by inflating asset
prices and we have been faffing about doing that.
The new scientific economics of globalisation = 1920's neoclassical economics with some
complex maths on top.
" Distinctions must be kept in mind between quantity and quality of growth, between its
costs and return, and between the short and the long term. Goals for more growth should
specify more growth of what and for what "
This is not by me, but by the creator of the GDP formula, Simon Kuznets. GDP is a very
poor indicator for many reasons, even apart from those mentioned above. Borrowing money and
squandering it adds to GDP while the resulting debt is ignored. Extracting and burning fossil
fuels adds to GDP while the future depletion is ignored. Stripmining and deforesting nature
adds to GDP while you get my drift. To paraphrase Bastiat, the growth in GDP that is seen
tends to mask decline in areas like nature and wellbeing that are not seen.
It is tragic to see politicians and pundits thoughtlessly raving about a few tenths of a
percent change in GDP while never seeming to realize how poorly this represents things that
are really important to humanity.
When will people stop worshipping at the GDP altar?
Wonderful!
BrainyQuote attributes it ("Growth for the sake of growth is the ideology of the cancer
cell.") to Edward Abbey, who also came out with "Society is like a stew. If you don't stir it
up every once in a while then a layer of scum floats to the top."
Thank you.
"Anyone who believes exponential growth can go on forever in a finite world is either a
madman or an economist."
"Attributed to Kenneth Boulding in: United States. Congress. House (1973) Energy
reorganization act of 1973: Hearings, Ninety-third Congress, first session, on H.R. 11510. p.
248"
Where the author says 'For much of the human story, societies were nomadic or
semi-nomadic, and organized in immediate-return systems.' that is not entirely true that.
Here I am thinking of the early Bantu in their expansion in Africa. Their wealth for them
were in their cattle herds which being mobile, made possible the expansion of the Bantu down
eastern Africa and into Southern Africa. These were long-term investments and Bantu society
evolved to take care of these herds as they expanded. Your wealth in that society was in how
many cattle you had.
I suppose when you think about it, the paradigm of growth works – to an extent –
when there are more lands to discover, more continents to be opened up, more frontiers to be
discovered. But all of that ran out a century ago and so with no more new resources to be
found to be exploited, we have now reached the point where where we have come up hard against
the natural limits of this planet. And yet, our economies still use the same mode of
operating when we lived in an ever-expanding world. We are far beyond the point where we
should have evolved into a closed-loop economy.
More than that. For example. A young man could only really use cattle to be the dowry that
he would need to attract a bride so cattle was a sign of his wealth. The status came with it.
Cattle shaped their society immensely. Their villages were huge rings where the cattle would
be locked in of a night and were called kraals. The people were so familiar with their cattle
that a herdsman at a glance of a herd of several hundred cattle would be able to tell
straight away if one were missing. It was a fascinating society.
The statement "For much of the human story, societies were nomadic or semi-nomadic, and
organized in immediate-return systems" is absolutely true. Please see the book "Limited
Wants, Unlimited Means" for a good primer. It includes an excerpt from Marshall Sahlins' "The
Original Affluent Society" – a great introduction to hunter-gatherer societies. There
is also a wonderful comparison of immediate return and delayed return societies as
exemplified in the Hadza people, and the problems that arise once an immediate return society
begins to settle, even minimally.
The Bantu evolved later and are agro-pastoralists, not foragers. The Hadza have persisted
as foragers even after contact with the Bantu and other groups. They have also repeatedly
resisted government and missionary efforts to introduce farming and Christianity. The Hadza
are perhaps the best example of how human beings lived on earth for over 99% of our
existence, that being in a largely cooperative, egalitarian manner, devoid of concepts such
as wealth.
Bantu people were not cattle herders, west central and much of Southern Africa is
basically forest, there's no way in this world anyone could move herds this way; it's our
northern brothers and sisters that are cattle herders. That being said, culturally we (Bantu)
generally moved to set up new families/villages that's how we spread not through some farming
technique, that's false
When I comment with someone, my wife for instance, about the need to get rid of GDP growth
as the main political objective and think of small well being objectives I tipically receive
commiseration in their eyes: "Yes Nacho, you are right, go and rest for a while"
As usual, scale is ignored. In my (still living) 94 year old mother's lifetime, human
population quadrupled. In large mammals, this is sometimes called "plague phase." Add a
(minimally) tenfold increase in technological leverage in converting finite resources into
infrastructure, food, transportation, consumable goods and services, and the increasingly
rapid decline of the ecosphere is hardly a surprise. Dematerialization of the economy is a
myth! And don't expect money printing or cyber tokens as solutions. They are simply power
tools to access real stuff.
One of the drivers of growth in the UK in the late 18th century that was missing, was
money. It reached a crisis stage in 1797.
A chronic shortage of coins, silver specie in particular.
Then, the freebooters came to the rescue!
Silver 8 Reales coins plundered from the Spanish were reworked into being coins of the
British realm & many other outposts in the colonies.
The first effort was pretty weak, all that was done was they were counterstamped with a
small portrait of King George III upon the countenance of King Charles IIII, which led to
this ditty:
"In order to enable the Spanish Dollar to pass, the head of a fool was struck on the neck
of an ass."
A couple of drivers of growth showed up both around the same time, the Haber Bosch process
that allowed for pretty much unlimited food resources, and worldwide fiat money, which also
had no limits to production.
We've quadrupled the world's population since these 2 events.
The Haber-Bosch process allowed for a vast, but in no way unlimited, expansion of
production.
Fiat money can be produced in unlimited amounts, but, according to both common sense and MMT,
actual production also has actual limits.
Setting the world free from first gold and then silver restraints (the last silver coins
issued for circulation in the 1st world was in 1969) allowed for a as much as you'd like fiat
economy, beyond limits and also risk. (for now, that is)
For what it's worth, there has never been an instance of hyperinflation in the cyber money
age.
As much wood, steel and cement, or as many doctors, teachers and entertainers as you'd
like, without limits, just because money can be printed without limits?
It's a fundamental issue: money is an abstraction that can increase without limits; the
real world, the real economy, is not. MMT does address that, but I think it's a root source
of the persistent inflation that plagued the economy until rather recently. Apparently the
Fed, or somebody, can stop it if they wish. However, I think that that history is one reason
for the resistance to MMT – it sounds like a formula for more inflation. Since it
hasn't actually been tried as a policy (the Pentagon's limitless funds are really just
corruption), we won't know for sure until it's tried. There always seems to be a lot that the
economists don't know or won't admit.
Politicians don't have the analytical tools to pick apart the "constant growth" argument
so they default to trumpeting it as a cure for all social ills (no doubt with encouragement
from mainstream economists). On the other end of the spectrum, the growth story seduces
ordinary people because they're told their share of the spoils, courtesy of the trickling
down effect, will lead them to a "better life". As such, nothing short of a massive
ideological decolonization effort is needed to strip growth of the superhero status it enjoys
in contemporary economic discourse.
The only positive hope is that enough people take it upon themselves to rise to the
occasion. People who have freed themselves from the tyranny of the current economic system
need to be examples for others to follow. Those that can, must change their lifestyles. They
indirectly become leaders by example.
There is a spiritual component in this transformation that has not really surfaced yet,
but feels like it is stirring under the surface. There is so much denial going on that
something will burst forth. What form that takes is anyones guess, but most people are just
looking for leadership when pressed.
Instead of the neoliberal message of selfish pursuits lead to a better life, the message
of self-sacrifice and service to something greater resonates with most people. Instead of
being just lip-service or propaganda, this sentiment must be channeled into concrete policies
and actions- beginning with oneself.
Underlying all this is the need for peace. The Big Lie of growth pales in comparison to
the Big Lie of perpetual war. Both lies reinforce each other.
How to explain the conflict between capitalists and well, all the rest, other than a
spiritual war. Where does one place ones faith? Violent and selfish Nationalism will not
suffice.
Strength in humility instead of conquest is the dividing line. The decolonization of the
human mind must be followed by an awareness and consciousness that the world is here to live
in, not conquer. That is an enormous shift in human action and consciousness- those that live
this ideal must be valued and emulated.
The growth paradigm, I suggest, is a form of fetishistic consciousness.
Elsewhere today Lambert talks about religion as Marx's "opiate of the people" but there
are many versions of that drug and our secular overlords seem to have replaced the Bible with
other unquestioned assumptions, many of them economic. Perhaps at some point rationality has
its limits and illusions of some kind of are necessary to make the engine go. The problem
unfortunately is that the current engineers seem to believe those illusions themselves and
follow them blindly. They are addicts too. Is it time to "just say no"?
Good essay. The author gets the the heart of it with this –
The evolution of the growth paradigm was integrally connected to the capitalist system
and its colonial thrusts. The basic link between the growth drive and capitalism is
transparent. The latter is a system of competitive accumulation. The former, in suggesting
that the system is natural and brings benefit also to the '99%', provides ideological cover
in that growth serves as an idealised and democratised redescription of capital
accumulation.
– where the theory of growth is an attempt to rationalize the greed of the few who
really like playing capitalist at the expense of everyone else. How about they get their
jollies playing Monopoly and leave the rest of us alone?
I'll just leave this here, a beautiful tune by one of my favorite bands, Old Crow Medicine
Show. Four minutes that will make you feel better after reading of all the nastiness in the
world, and very apropos to this article –
is an attempt to rationalize the greed of the few who really like playing capitalist at
the expense of everyone else.
As noxious as their displays of wealth are, and as much as it's possible to make a case
that pathological narcissism infuses the system, the motive to accumulate to compete with
rivals, current and future, is central. It's politically useful to attack the way that this
motive draws others into its van, i.e. to make them personally despicable. But it might be
worthwhile to consider how much the accumulation motive is embodied as a kind of social
contract in the firm's organization. I imagine that individual capitalists say to themselves
"I've made my pile, time to sail away in my yacht," but the firm and those who will stay on
want to keep things going.
. The moral economy of sharing necessitates a muscular egalitarianism that is
undermined by the accumulation of property.
this really stuck out to me.
and I can't really identify why, however I couldn't stop thinking about the growing
proliferation of plastic while reading the article
Back in the early 80s, the professor for whom I was a grad assistant frequently urged me
to read Canetti's "Crowds and Power." It's a powerful and useful book. Well-written and
accessible and full of thought-provoking ideas. I'd recommend it for anyone who wants to
ponder social relations.
In this case, Dale seems to use Canetti's book as a kind of straw-man entry to his real
topic:an intro to his discussion of growth/degrowth. I guess you gotta start somewhere? Maybe
he should have simply directly referenced Canetti on his notion of "feast crowds" (pg 62 of
my edition of Crowds and Power.)
The above comments by Sound of the Suburbs and Joe Oskam are incisive, imo. The essence of
the matter boils down to developing a more rigorous distinction (and understanding) of the
difference between productive economic activity and non-productive economic activity. Hudson
is really good on this.
Go back further and Gustave Le Bon's The Crowd from 1896 ages well, because human
motives don't change much
"The masses have never thirsted after truth. Whoever can supply them with illusions is
easily their master; whoever attempts to destroy their illusions is always their
victim."
"A crowd thinks in images, and the image itself calls up a series of other images,
having no logical connection with the first A crowd scarcely distinguishes between the
subjective and the objective. It accepts as real the images invoked in its mind, though
they most often have only a very distant relation with the observed facts .Crowds being
only capable of thinking in images are only to be impressed by images."
"We see, then, that the disappearance of the conscious personality, the predominance of
the unconscious personality, the turning by means of suggestion and contagion of feelings
and ideas in an identical direction, the tendency to immediately transform the suggested
ideas into acts; these, we see, are the principal characteristics of the individual forming
part of a crowd. He is no longer himself, but has become an automaton who has ceased to be
guided by his will."
As I read these quoted words it is hard not to think of the crowds that surround Trump on
his so-called "rallies" for his base. One cannot but help ask, Why is anyone listening to
this man? Ans: "He is no longer himself, but has become an automaton who has ceased to be
guided by his will."
What makes the masses the masses is that they are followers. This is a double edged sword
the elite exploit relentlessly- that is what makes them the elite. They hold the power, and
desire, to manipulate the masses through narrative and image. These stories and images make
the world and human experience comprehensible. When corruption sinks in, that whole group is
doomed to eventual failure if a self-correcting mechanism is not present. Leaders/elite and
masses both fail.
It is very self-serving for the elite to blame the masses when the "illusions" stop
working their magic. Have the elite ever "thirsted after truth" either? Truth meaning a
universal truth applicable to all, or the Truth embodied in a personal view as apposed to a
public view? Such Truths tend to obfuscate the drive for personal power, which doesn't sit
well within groups of people let alone groups of differing cultural or ethnic
experiences.
Manipulation of the masses is not the problem, it is manipulation to what end that is the
issue. In that respect, the elite leadership should take more responsibility and bear a
greater portion of blame for failure- for in fact, they are driving the whole process.
In a nutshell, this is the failure of the current human situation. A greedy elite
incapable or unwilling to use the powers at hand to bring about a fair and equatable world.
It is just too easy for them to continue their deceitful manipulations and blame hapless or
trusting victims.
Another way is for the elite leadership to listen to the people/masses and take their
needs and desires into account when molding public opinion. Such an elite will foster the
population's wellbeing, not fear them or treat them as a mob. That process makes the elite
leadership legitimate.
The most stupid leadership is one that fails to change course when the images and
narratives moving its society are failing. The whole society becomes weak and ineffective on
multiple levels.
At some point, the factional fighting must stop. It seems inevitable that human society
will rebalance itself to manageable levels. The question becomes how violent that transition
will be.
LeBon writes of crowds as though there is a complete discontinuity between a person's
thought and behavior when they are in a crowd and when they are not. That's nonsense, a
cocktail party generalization. I've been in plenty of political crowds and the remarkable
transformation he purports was not evident. Le Bon was a rank conservative and his analysis
reflected his detestation of the French left, fueled by his experience of the Commune. He's
writing in a way that helps justify the massacres that concluded it.
I often wondered about this fetishisation of growth in GDP (I'm in my sixties now), when
in developed countries it seemed to have as many negatives as positives.
Then I realised that capital, in its most general sense, doesn't invest in the hope of
getting its money back, but in the hope of its money back plus some more . The only way that
can carry on for very long is through growth.
I'm not an economist, but that explanation really rang true for me.
Just Thank You. Thank You tons. I will remember the name Gareth Dale and The Ecologist.
And the reference to the (unexplained) runaway condition of human economics as "Capitalist
Time" v. (of course) real time. Because as we have learned here at NC "financial time goes
much faster than real time." And etc. This essay was wonderful, and now we have an outline of
why that is true.
"roughly speaking when per capita GDP exceeds $15,000. At higher levels, the translation
of growth into improvements in health and well-being is tenuous."
The implications of this statement are large, for it multiplies out to a US GDP of 330E6 x
15E3 = 4.95 Trillion or about ONE FOURTH of the current USA economic output (19.39 trillion
in 2017).
Forget the Green New Deal, shrink economic output by 3/4 in the USA while drastically
lowering inequality to share the shrunken economic pie and one should observe a large
positive effect on future climate change while having a reasonable USA citizen
well-being,.
economic welfare cannot be adequately measured unless the personal distribution of income is
known. And no income measurement undertakes to estimate the reverse side of income, that is,
the intensity and unpleasantness of effort going into the earning of income. The welfare of a
nation can, therefore, scarcely be inferred from a measurement of national income as defined
above.
Thanks as always for the valuable posts. I am curious about your opinion on something.
Once oil production peaks and plateaus, then inevitably declines, do you think world GDP will
start declining afterwards? I'd assume it would lag behind it by a short period of time
possibly (obviously depending on country etc but overall).
If that was to happen and no energy source can cover the decline rate, wouldn't the world be
pretty fucked economically thereafter? Hence one can assume or take a wild ass guess that the
decline after peak would resemble something like Venezuela. So not a smooth short % decline
rate.
I hope what i am asking makes sense.
Mike, in all honesty, I have no idea. The problem is there are so many other things going on
at the same time. The world is getting warmer, water tables are falling everywhere, rivers
are drying up, fisheries are disappearing, and I could go on for an hour explaining how
everything is falling apart. And now we hear that the insect population is declining very
fast. Why?
So as fossil energy starts to decline and renewables will not help very much, what will
happen. Will that exacerbate all our other problems. Yes, it most likely will. Look at
Venezuela. Is that what almost every nation will look like in 50 years? Well, probably not
every nation but a lot of them for sure.
So, the world is going to hell in a handbasket. But I am 80 years old. I will be safely
dead when the shit hits the fan. Lucky me.
x Ignored
says: 02/26/2019
at 3:27 pm I think not all
followed the link
article is big.
Maybe someone will be interested
I will write here in several posts.
I hope someone will be interested.
I continue:
The fluctuations of this second parameter, associated with economic crises and recessions
observed in the period under review, make it possible to evaluate the contribution of the
notorious "energy efficiency" to the global increase in energy consumption. In a situation of
almost "zero growth" of the world economy, which occurred in the period 2008–2009, the
consumption of primary energy decreased by 0.8% per year. At the same time, for each percent of
economic growth, it is necessary to "pay off" by increasing the consumption of primary energy
by about 0.6%.
In an expected way, an improvement in energy efficiency was reflected in monetary
indicators: in 2017, each TOE of consumed energy generated $ 8,617 of global GDP, which
corresponds to 1.7% of annual growth over the period 2007–2017.
Of course, the world's primary energy is not evenly distributed across countries. Even the
top five leaders in the use of primary energy: China, the United States, the European Union,
India and Russia – have completely different consumption patterns, which are associated
with the historical, geographical, economic and political differences of these countries.
Thus, as of 2017, China has already been the largest global consumer of primary energy: its
energy consumption has reached 3.132 billion TOE, which is equal to 23% of the global
consumption of primary energy. The growth of Chinese energy consumption is also impressive: in
the period from 1990 to 2013, per capita energy consumption in China increased from 0.602 TOE
to 2.14 TOE -- that is, almost four times. Since then, energy consumption growth in China has
somewhat slowed down, and by 2017, per capita energy consumption there was only 2.26 TOE, which
is not only still significantly lower than per capita energy consumption in countries with
developed capitalist economies, but and corresponds to an increase in energy consumption of
about 1.5% per year (and an economic growth of 2% per year).
If we consider the inertia of this historical trend and additionally take into account the
fact that the new policy of the ruling CPC implies a transition to stimulating consumer demand
within the country, then we can assume that by 2050 per capita energy consumption in China
should reach 5-5.5 TOE. This figure takes into account, in addition, the observed impact of
energy efficiency (the same 0.8% per year), but suggests that GDP per capita in China will grow
to about the equivalent of $ 50,000 by 2050. At the same time, it should be understood that in
a part of the population, a conservative forecast is adopted, according to which the population
of China will reach a peak by 2030 and decrease to 1.36 billion by 2050. Taking into account
these factors, China's energy demand in 2050 will exceed 7,000 million TOE, i.e., it will grow
2.23 times and make up more than half of the current volume of primary energy production.
Information that, according to fertility data, the population of China in 2018 decreased by
1.27 million people, has not yet been officially confirmed, and it is clear that the above
figure can be significantly adjusted downward, but in any case, China will pull the world
energy "blanket" on themselves.
The United States is the second largest consumer of primary energy in the world. In 2017,
the US energy consumption amounted to 2,235 million TOE, which corresponds to 17% of world
primary energy consumption. US per capita energy consumption peaked at 8.01 TOE in 2000, which
was a historic peak. For the period from 2007 to 2009, per capita energy consumption in the
United States decreased from 7.7 to 7.04 TOE, and in 2017 it reached the level of 6.87 TOE.
Nevertheless, the United States continues to be the most "voracious" consumer of primary energy
per capita, and their ability to further reduce the achieved level is very slim if they are not
linked to the global restructuring of their economic and social structure, which is highly
unlikely without a deep national crisis. An additional factor is the steady growth of the US
population, which has no tendency to slow down until 2050.
Reply
Still continuing (3):
The European Union is the third largest consumer of primary energy in the world. In 2017, the
energy consumption of the European Union amounted to 1,689 million TOE, which is equivalent
to 13% of world primary energy consumption. Historically, EU per capita energy consumption
was the highest before the onset of the 2008 crisis and amounted to 3.71 TOE in 2006. In the
future, the European Union immediately fell into a double crisis: the global economic year
2008–2009 and its own financial one, connected with the debts of the Mediterranean
countries, first of all – Greece. This led to the fact that energy consumption per
capita in the EU was reduced to a minimum of 3.2 TOE in 2014. By 2017, per capita energy
consumption in the EU was only partially recovered and reached 3.29 TOE. At the same time,
its value has a very pronounced country differentiation, and if for Germany in 2017 this
figure was 3.86 TOE, for France – 3.61 TOE, then for the UK – 2.72 TOE, for
Poland – 2.71 TOE, for Portugal – 2.23 TOE, and for Romania – 1.69 ToE. In
general, this level of per capita energy consumption quite adequately reflects the EU's
longstanding efforts towards supporting energy efficiency, but also vividly shows the limits
of what can be achieved within the framework of a concept combining a set of measures for
energy saving and green energy replacement. As we see, as a result of the implementation of
such programs, the European Union did not become "European China" at all, although it became
less like "European America" in the energy issue.
Thus, it can be assumed that in the long-term trend, the per capita energy consumption of
EU countries will decrease slightly, only by copying the general trend of slow increase in
energy efficiency.
India is the fourth largest consumer of primary energy in the world. In 2017, energy
consumption in India increased to 754 million TOE, which is 5.6% of the world. India, like
China, is characterized by very rapid economic growth, which was expressed in terms of per
capita energy consumption: more than twice since 1990, when it amounted to 0.225 TOE, to
0.562 TOE in 2017. If per capita energy consumption in India continues to follow the same
pace, by 2050 it should reach a mark of 1.21 TOE, while India's GDP per capita will reach
approximately 19 thousand dollars. It is expected that by 2050 the population of India will
grow to 1.72 billion people. That is, it can be expected that by 2050 India's energy demand
will exceed 2 billion THN – or it will grow 2.65 times, overtaking even China in terms
of relative growth, and in absolute figures ahead of the European Union.
And finally, the Russian Federation, which is the fifth of the world's largest energy
consumers. In 2017, primary energy consumption in Russia amounted to 698 million TOE, which
accounted for 5.2% of world primary energy consumption. In 1990, when Russia was still part
of the USSR, per capita energy consumption in Russia was 5.8 TOE. Over the past years, Russia
has already passed its historic low, when the economy of the new country was torn to shreds
by neoliberal "shock therapy", the short-sighted policy of rapid privatization and the total
introduction of the "wild" market – including in the energy sector. This was reflected
in the fact that the minimum energy consumption per capita in Russia was achieved by 1998 and
amounted to 4.03 TOE. Smaller values of per capita consumption, apparently, are
simply impossible in a cold and harsh Russian climate, since heat supply is a vital function
in it – therefore, a value of 4.03 TOE can be considered the level of "basic survival"
in Russia. An interesting fact: in Canada, where the climate is very similar to that of
Russia, per capita energy consumption is 9.5 TOE as of 2017. At the same time, no one in
Canada speaks of "cheap electricity" or "too high costs for heat supply," realizing that this
is the necessary conditions for the survival of the country's population.
Since 1998, per capita energy consumption in Russia has been steadily growing and reached
a level of 4.83 Toe in 2017, which corresponds to about 0.8% per year. Most likely, this
trend will continue in the future, since the living standards of the Russian population are
still lower than the living standards in the European Union or the United States, and the
Russian level of per capita consumption lags behind the level of the late USSR, even taking
into account the accumulated "bonuses" in energy efficiency.
World energy: forecast
As noted above, the parameters of GDP and total energy consumption – just as the
parameters of per capita GDP and per capita energy consumption – in the current economy
have a strong correlation.
Moreover, almost all the leading countries of the world fit into a very clearly traceable
ratio, which corresponds to 10 thousand dollars of per capita GDP for every one TOE per
capita consumption. Smaller values of this parameter are characteristic of a
number of underdeveloped and developing countries, which leads to a "average" value of $
8,617 per 1 TOE for global GDP.
There are deviations and "up" on the scale of specific energy – this is already
mentioned in the text of Russia, Canada and the United States.
For Canada, Russia and the Scandinavian countries, you can build a separate branch of the
graph, on which for the "northern" economies it turns out that for every 10 thousand dollars
of per capita GDP they need to spend about 2 TOE per capita consumption – twice as much
as for those living in tropical or subtropical climate of China or India.
The phenomenon of "overconsumption" of the United States, as is clear, has a different
nature – it is associated with the actual "imperial" energy tax for the whole world,
which allows the United States to still maintain excessive energy consumption, which is in no
way connected with the country's climate the political structure of the United States, which
is the world hegemon.
It is important to emphasize that, if we exclude from consideration the "imperial" United
States and "northern" Russia and Canada, then the correlation between oil consumption and the
GDP of a particular country acquires almost 100% of its character. For example, Japan, not
mentioned above, was the sixth largest energy consumer in the world in 2017 and surpassed
most EU countries in terms of both per capita GDP and per capita oil consumption! Although,
it would seem, the southern conditions of Japan, almost completely located in the subtropical
and tropical zones, suggest lower figures for per capita oil consumption.
In 2017, energy consumption in Japan amounted to 456 million TOE, which amounted to 3.4%
of world primary energy consumption. Historical peak energy consumption per capita in Japan
reached in 2005 and amounted to 4.15 TOE. Since then, energy consumption in Japan has tended
to decline, as the country's national economy fluctuated between a hidden recession and sheer
economic stagnation. The effect of the largest nuclear accident at the Fukushima nuclear
power plant in 2011 is indicative in this respect: despite the radical restructuring of the
energy sector in Japan caused by this catastrophe and the almost complete closure of nuclear
power plants in the country, the consumption of primary energy in the Land of the Rising Sun
has not undergone such a sharp falls: almost all the "fallen out" volumes of atomic energy
were promptly replaced by increased consumption of oil and natural gas. And the general trend
of growth or reduction of primary energy consumption still showed a correlation with only
three parameters: the country's population, the level of per capita GDP of the national
economy and the general trend of improving energy efficiency, which in the case of Japan
describes the same energy saving parameter of 0.8% per year .
By 2016, per capita energy consumption in Japan decreased to 3.55 TOE, which was even
lower than per capita consumption in 1990, with a fundamentally higher GDP and a practically
stable population (an increase of only 3 million people with 123 million in 1990). In 2017,
per capita energy consumption in Japan grew only slightly to 3.6 TOE, which is quite
consistent with the very modest growth of the national economy.
As already mentioned, the practical economic result of "green" energy, observed for the
period 2007–2017, can be optimistically described as "zero" or "poorly distinguishable
from statistical error". Of course, one can complain that the sun and wind today give only 2%
of the global primary energy production and you need to "just give them more time (and
money)", but the sad reality is this: supposedly "promising" new energy sources affect the
economy. Their implementation in the countries of the European Union did not affect the
picture of energy efficiency and did not alter the ratio between GDP and tons of oil
equivalent spent on its production, while the global crisis and the debt crisis of the EU
itself turned out to be much more significant factors.
Still continuing (4):
A simple forecast follows from these sad conclusions: even if over the next decade the volume
of "green" energy again grows 4 times, then its share will reach only 8%. However, even this
level is an almost unrealizable dream: according to most forecasts – for example, the
IEA in 2017 and the Energy Information Administration (EIA) in 2018 – the actual
relative growth of renewable energy sources will be only about 2–20 years before 2030.
2.5 times. Unknown conclusion: even by 2030, the share of oil, natural gas and coal will be
at least 75% of the total primary energy level, which will be related to nuclear and
hydropower and the continuing relative waste from the use of wood energy and biomass. During
the years 2030-2040, the year can be almost fantastic, and all this will be due to the
difficulties that must be achieved in the field of oil, gas and coal in the balance sheet.
energy.
An extremely unpleasant situation with such a pessimistic forecast is expected with world
oil production. At the moment, its growth was concentrated in only nine oil-producing
countries. As an example, oil production in China is expected in 2015, after which it was not
even possible to achieve an increase in Chinese oil production.
Today, this "growing oil subsoil" includes the following countries (the estimated year of
oil production and data source are shown in brackets): Canada (peak in 2049, BP), USA (2042,
EIA), Iraq (2042, BP) , Kuwait (2040, BP), Iran (2039, BP), United Arab Emirates (2037, BP),
Russia (2033, IEA), Saudi Arabia (2030, BP), Brazil (2024, BP).
The exit from almost all the "growing" sources of oil production in the world is caused by
a drop in production from 2030 to 2040, which means the global energy crisis of humanity. and
there is "tasty", and there is energy, and all this economic strategy of modern
civilization.
Of course, partial replacement with liquid motor fuel, which is easily obtained from
petroleum, can be carried out using natural gas, as well as using chemical reforming in
various types of liquid hydrocarbons and molecular hydrogen.
However, this situation is hardly optimistic. In 2015, the world's peak production was
observed. Currently, natural gas production growth is concentrated in only ten countries (the
estimated year of natural gas production and data source are shown in parentheses): Canada
(2074, IEA), USA (2063, EIA), Iran (2046, BP), Qatar (2043 , BP), Saudi Arabia (2037, BP),
Algeria (2027, BP), China (2027, BP), Australia (2026, BP), Russia (2026, BP), Norway (2023,
IEA).
It is easy to see that already after 2030, the natural gas market will, like the oil
market, be practically monopolized by four or five countries, each of which will be able to
easily manipulate prices by simply adjusting its own production, since other players simply
will not have any -or free capacity. Unfortunately, in the case of Russian oil, and when
analyzing the prospects for Russian gas in such an oligopolistic market, it can be noted that
Russia will be in the "first echelon" of losers, at whose expense they will try to solve
world problems with the energy balance.
Of course, a partial replacement of natural gas and oil can be expected in the form of a
return to more "dirty" and expensive coal. By the way, it was precisely such a strategy that
China and India chose in the 1990s, who, without having wide access to the oil and natural
gas market, relied on their own deposits of hard coal. The incidental damage to ecology and
human health in this case was the price paid for the rapid industrialization paid by Indian
and Chinese society.
However, even on the "coal" path, humanity has its own problems. Today, the rapid growth
of coal production is possible only in four (!) Countries of the world. All other countries
have already passed their peak of hard coal mining, some of them more recently, such as the
USA (2008), China (2013) or South Africa (2014).
According to estimates by international energy agencies, today, growth in coal production
is possible only in the following countries (in brackets is the expected year of peak coal
mining and source of data): Russia (2112, BP), India (2052, BP), Australia (2032, IEA) ,
Indonesia (2031, BP).
I apologize for
posting an article here
– It was designed for a reader in Russia.
Ending:
Mirovaya energiya: stsenariy
I
World Energy Scenario
The inertial scenario of the development of mankind suggests that by 2050 the world
consumption of primary energy will increase one and a half times and will be about 20 billion
TOE. This indicator takes into account both the observed effects of energy conservation and a
very conservative estimate of future economic growth – within 2–2.5% of the
annual increase in global GDP.
However, crisis tendencies will be waiting for us much earlier than in 2050: it seems that
the gap between supply and demand on the global energy market will be formed by the early
2030s, when global energy consumption will approach the level of 16-17 billion TNE . As
already mentioned, peak years for world production of oil, natural gas and coal are coming in
the very near future. According to the IEA, the peak of world oil production will come as
early as 2022, when all of humanity will be able to provide about 4,530 million TOE with oil.
According to the same forecast, coal will be at its peak in 2028, when at the expense of it
it will be possible to get about 6 billion THE (which corresponds to about 8.4 billion tons
of physical coal mining, due to its lower energy value). And finally, global natural gas
production will peak in 2036, when this energy carrier can provide 3.9 billion ToE.
It is easy to understand that, taking into account the predicted share of oil, coal and
natural gas in primary energy of about 75% by 2030, the sum of peak production (14,430 TOE)
almost fully corresponds to ¾ the lower bar of estimated consumption in 2030 (16,000
TOE) . It should be understood that the peak values for oil and hard coal in
the world will be reached before 2030, after which these energy carriers will only decrease
in the volume of physical production. In part, this effect can be compensated for through the
involvement of more low-margin fields (as it happened with shale oil and gas), but the limits
of such compensatory mechanisms are not unlimited. In addition, a significant increase in the
price of primary energy in itself is a sign of the crisis of the existing economic structure,
which clearly links social stability with economic growth, and economic growth is fueled
precisely by the available (both physically and in price) energy.
Of course, the increase in the price of oil, natural gas and coal will improve the
economic prospects of "green" energy (simply due to the banal high cost of any energy
available to humanity), but this also means that within future economies huge amounts of
energy will simply be spent on maintaining the internal structure economies and the
livelihoods of the critically needed primary energy sector.
An idea of this kind of economic structure may well be given by the economic
model of the USSR, where such a bias towards the enterprises of "Group A" was dictated by
military and state construction, while consumer goods of the enterprises of "Group B" were in
short supply. However, in the USSR this mechanism was a reflection of the planned economy, in
the case of the supposed "peak" scenario of 2030, it would be formed by purely market
mechanisms within the framework of the "classical" capitalist economy.
It is clear that this implies a "contraction" of the final consumption of the population,
which will be caused by the forced flow of capital to the high-yielding primary energy
production sectors, forced and natural in the framework of the capitalist economy. At the
same time, the "welfare society" of the model countries of the "collective West", such as the
European Union and, in particular, the United States, will collapse. Faced with this kind of
crisis, the "overconsuming" Western countries will unambiguously join the battle for the
remnants of mineral energy resources. Such events and wars are likely to surpass even the
current "oil conflicts" in the Middle East, North Africa and Latin America, in which the
United States and its European allies are directly involved.
Probably, Russia will again be hit, which remains the "last natural storeroom" for large
reserves of sufficiently cheap oil, natural gas and coal. Most likely, the "energy predators"
will try once again to control the richest natural resources of our country, which, under
various pretexts, will strive to declare "the heritage of all mankind". In fact, we will talk
about the banal energy robbery of our country, which will hide behind the fig leaf of
propaganda.
Another disappointing conclusion follows from the energy "poverty" of the "world of the
future": Russia today has to prepare for the fact that our "four hard-earned oil equivalent
per capita", which, as noted above, is the basic condition for survival in Russia's severe
climate should be in the future provided for the population of the country from sources other
than oil, natural gas and coal. The challenges facing the world are facing Russia, but what
the United States is the reason for the rejection of overconsumption turns out to be another
challenge for Russia in the face of cold and death by starvation.
Unfortunately, the "world of the future" does not promise to be a pleasant and comfortable
place to live. And we should prepare for such a negative scenario today.
Thank you for the thought provoking thoughts Opritov Alexander.
It is useful to hear these ideas from the perspective of those from various countries, such
as yours.
The data dovetails closely with what has been presented from other sources, by and large.
The geopolitical ramifications of these challenges is obviously paramount.
I am concerned that countries will be pressured to go to war over the shortfall in energy,
through desperation.
A few points about different countries-
The USA could likely decrease it energy use/capita considerably (perhaps 30%), without severe
economic repercussion. But it is not taking the issue seriously.
Some countries like Korea will have a very hard time decreasing consumption. They are cold,
and heavily industrialized. And rely almost entirely on imported fossil fuel.
I expect India, and China, to lean heavily toward suppliers of fuel as they plan their
position in the world and choose allies. Iran and Australia both seem to be prime suppliers
considering proximity.
Concerns over global warming will be swamped by concerns over energy shortage, despite the
severity of the change, such as food supply disruption and forced migration. These climate
problems will likely be much more severe after energy shortage problems develop due to the
lag in CO2 effects.
Mostly I agree with you.
It's hard to imagine the future.
Much will depend on politicians and the willingness of peoples to reduce consumption for the
sake of an acceptable standard of living in the future.
Passing the peak of energy consumption will lead to a decrease in global GDP.
This means a decrease in per capita consumption.
Reduced consumption = reduced demand = industrial workload = crisis.
I believe that in order to save people, they will live in multi-storey buildings, perhaps
without an elevator (of course, it may not be soon for 50 years), the transport will be
public, there will not be enough private cars.
In addition to the peak of hydrocarbons, the peak of copper, gold, silver, tin, and a lot
more is coming. How to solve these problems I don't want to dream
Post scriptum. The problem of CO2 and the problem of global warming in Russia is not a
popular topic. So much that everyone refuses to discuss it and even think about it.
Approximately as an alien topic.
from what I recall the global debt to GDP ratio is about 320% in Q4 2018. GDP growth will cease when debt expansion ceases (FWIW
I suspect widely acknowledged peak oil in the rear view mirror, so to speak, will likely play a role in the realization that event)
In 2008 the size of the US economy was $14.5 trillion. A decade later, the size of the economy is $19.7 trillion, so about
36% greater.
Over the same ten years the national debt has grown from $9.4 trillion to over $21 trillion- about 123% greater.
It's hard to pretend that's not a problem, but people still do try.
Interestingly enough .
Census Bureau, Treasury, EIA Detail American Insolvency
"And comparing the US primary energy consumption versus the Wilshire 5000 (representing the value of all publicly traded US
equity), a funny thing shows up. Flat to declining energy consumption vs. surging asset valuations this is typically understood
as a red flag for phony wealth creation via market manipulation, monetization, and banana republic central banking."
Is a slow recession a tragedy, with chaos necessarily baked into the equation?
If we are lucky, that will be the global challenge.
If not so lucky, recession will be depression.
Some places more than others, of course.
Russia may be be looking more solid than most in the 2030's.
Western Europe, not so good.
Overall, I was referring to the conditions that will likely ensue after peak fossil.
As very well stated in the post by Opritov Alexander above (and by Ron so many times), the hurdles to replace fossil energy are
insurmountable, by and large.
As you have pointed out before, there is a big risk for economic contraction around the time of peal oil.
I expect it to be severe in degree, especially among countries that are elderly, heavily indebted, and heavily dependent on imported
energy. And many of these places are your trading partners, no matter what country you hail from.
Indebtedness is not just a transitory or 'paper' issue, IMHO. The cost to attempt transition to non-fossil energy will be huge
(beyond huge). How do you buy a second home (renewable energy on a countrywide basis), when you are already maxed out on your
credit for the 30 yr loan on your current one (maintenance of your current economic activity and dependents)?
As a slight aside, GDP is not very useful when determining the wealth of a country, since it includes frivolous activity that
will evaporate in tough times. Financial transactions, hair dressers, restaurants, sports and music entertainment, weddings, luxury
items such as fancy cars, boats and fashion, advertising , are examples of GDP components that can evaporate almost immediately
when the times get tough and the velocity of money heads towards zero.
GDP considers natural disasters like earthquakes, floods, tsunamis and hurricanes as being favorable to the economy. Add to this
the fact that these disasters are hated by the common people who rightly pray that this destruction happens as seldom as possible.
Once again, due to the poor fundamentals of the GDP system, the entire science of economics is branded as being anti social. Once
again, the true economic fundamentals are not being considered or else the question of economics being an anti-social science
does not arise. In this article we will first consider the prevalent viewpoint and then we will debunk the myths pertaining to
it.
When a metric values natural disasters as favorable to the economy then you know somethings being missed. I would suggest that
repairing after a storm is not growth. GDP makes no distinction between Construction and Reconstruction.
Why Did Simon Kuznets Want to Leave Military Spending out of GDP?
Simon Kuznets (Nobel 1971) usually gets the credit for doing as much as anyone to organize
our modern thinking about what should be included in GDP, or left out. But I had not known
that Kuznets apparently argued for leaving military spending out of GDP, on the grounds that
it wasn't actually "consumed" by anyone, but should instead be treated as an intermediate
input that supported production and consumption.
=== end ===
In political terms, excluding national defense from GDP would create the impression that
the government's statistical agency supports "Peaceniks" -- the critics of "oversized"
America's defense budget. It was incompatible with the imperial ambitions of the USA in
post-WWII era.
Simon Kuznets (
Nobel 1971 ) usually
gets the credit for doing as much as anyone to organize our modern thinking about what should
be included in GDP, or left out. But I had not known that Kuznets apparently argued for leaving
military spending out of GDP, on the grounds that it wasn't actually "consumed" by anyone, but
should instead be treated as an intermediate input that supported production and consumption.
Here's how Hugh Rockoff tells the story in his
essay, "On the Controversies behind the Origins of the Federal Economic Statistics," in the
Winter 2019 issue of the Journal of Economic Perspectives . [Full disclosure: I work at
JEP as Managing Editor.] Rockoff writes:
Military spending presented another problem. In one of his last discussions of national
income and product before US entry in World War II, Kuznets (1941, pp. 19–20) explained
that his estimates included "dreadnoughts, bombing planes, poison gas, and patent medicines
because they are rated economic goods in our country today," even though they "might well be
considered worthless and even harmful" in a society organized differently. In a footnote,
Kuznets (p. 31, fn. 5) used an analogy with private spending to buttress his case for
including military expenditures: "If the activities of the private police used by many large
corporations are productive, why not those of the municipal police? And if of the domestic
police, why not of the international police, i.e., the armed forces of the nation?" During
World War II, however, Kuznets (1945) modified his thinking. He argued that military spending
should be counted in national product during a time of total war, but it should be excluded
during peacetime because military spending was then an intermediary good for producing a flow
of consumption to consumers. Other economists, including decisively those at the Department
of Commerce, thought otherwise (Gilbert, Staehle, Woytinsky, and Kuznets 1944).
A number of economists, however, have found Kuznets's concept of a Peacetime National Income
to be attractive. Higgs (1992), for example, argued that the then-current interpretation of
the impact of World War II on the American economy, that it created unprecedented prosperity,
was reversed when one used Kuznets's peacetime concept rather than the conventional measure.
Higgs even took exception to Kuznets's decision to include some military durables such as
aircraft in investment because Kuznets thought that they could later be turned to peacetime
purposes.
In retrospect, a number of concerns weighed against adopting Kuznets's concept of peacetime
national product. One reason, as Coyle (2014, p. 20) suggests, was the rise of Keynesian
economics. In principle, one could use Kuznets's peacetime version of national product to
analyze the macroeconomy, but the conventional measure fit more smoothly into the simple
Keynesian model taught to a generation of economics students in Samuelson and other
textbooks. Perhaps the most important reason for rejecting Kuznets's concept, however, was
the Cold War. In his famous study of productivity, Kendrick (1961, p. 25) chose to include
all defense spending in his estimates of national product partly on the grounds that
"national security is at all times [Kendrick's italics] a prime objective of economic
organization." In political terms, excluding national defense from national product would
create the appearance that the government's statistical agency was siding with the critics of
America's defense budget. Of course, no one was required, as Kuznets had pointed out, to use
only one measure of aggregate product. To the contrary, Kuznets thought that it would be best
to produce a series of measures, some specialized for one purpose and some for another. But
as we have learned, public attention does tend to focus on a single measure of national
product, so the decision to ignore Kuznets's peacetime concept may have had important
consequences.
I find myself in agreement with the views of Kuznets expressed back in 1941, that
if private security guards and municipal police are in GDP, the military should be, too.
But more broadly, the dispute serves as a useful reminder that GDP includes some categories
of expenditures that society would have preferred not to make. For example, GDP includes all
measures for home security and corporate security--not just guards but also locks, bars, and
electronic measures. In addition, GDP includes cleaning up after pollution spills and natural
disasters, although it would certainly have been preferable if such events had not happened in
the first place. It would also be socially beneficial if people got more exercise and at
healthier diets, and as a result a substantial proportion of health care spending didn't need
to happen.
For other comments on the relationship between GDP and social welfare, readers might be
interested in the well-known comments from "Robert
Kennedy on the Shortcomings of GDP in 1968" (January 30, 2012). My own sense is that
economists are well-aware of the shortcomings of GDP--indeed, probably better aware of the
shortcomings than many critics. But economists also point out that on a wide array of
dimensions, people who live in societies with higher GDP tend to live better lives. For samples
of these arguments, see "Why GDP Growth
is Good" (October 11, 2012) and "GDP
and Social Welfare in the Long Run" (April 6, 2015).
> It appears that GDP is not going to be published by the BEA either.
Nonpublishing of GDP might actually be positive ;-) One less " number racket" metric to
deal with. Once a year publication would be more than enough.
Of course, there will be some deprivation among addicted to GDP neoliberal economists, but
that's the price to pay for the progress. All "cult of GDP" folk needs to be sent to the dust
bin of history anyway, with their books and fake math (aka mathiness).
Subtracting from it 66% of financial sector contribution would also be a step in the right
direction.
"... "GDP provides measurements of output, income and expenditure quite well, and these are needed to understand and devise fiscal and monetary policies. But this measure flatly fails when it comes to well being." ..."
"... As Michael Hudson has pointed out GDP includes all sorts of figures that rightly should be subtracted from economic output since they represent a cost, a drain on productivity as opposed to actual production. Fees charged by financiers, monopoly prices extracted by big pharma, ever-increasing rents, all these things make our economy more expensive, less competitive, and less productive, They make us collectively poorer, not richer. Fix how GDP is calculated and we'd see the truth behind the cheery numbers. ..."
"... I am curious if there was an ulterior motive when US switched from GNP to GDP in 1991; does anyone know ..."
"... The United States used GNP as its primary measure of total economic activity until 1991, when it began to use GDP.[11] In making the switch, the Bureau of Economic Analysis (BEA) noted both that GDP provided an easier comparison of other measures of economic activity in the United States and that "virtually all other countries have already adopted GDP as their primary measure of production".[12] Many economists have questioned how meaningful GNP or GDP is as a measure of a nation's economic well-being, as it does not count most unpaid work and counts much economic activity that is unproductive or actually destructive.[13] ..."
"... Human capital. This word as well as any other captures the dehumanizing nature of capitalism. Just a factor of production. We don't have blood and bone and families. We have exploitable skills. Screw that. Leave not one stone upon another when you rise up and destroy the dystopian economy these swine have created. ..."
"... So the most elite of the global elite have just now figured out that averages can be skewed by extreme outliers? What any undergrad student in statistics could tell you? Man, they're really selling the need for global hierarchies. ..."
GDP provides measurements of output, income and expenditure quite well, and these are
needed to understand and devise fiscal and monetary policies. But this measure flatly fails
when it comes to wellbeing.
I guess that's news to no-one but the Davos crowd.
They continue:
Hence growing international interest in a tool that still captures financial and produced
capital, but also the skills in our workforce (human capital), the cohesion in our society
(social capital) and the value of our environment (natural capital).
Work has advanced on some of these elements. The UN Environment Programme-led
Inclusive Wealth Index shows the aggregation through accounting and shadow pricing of
produced capital, natural capital and human capital for 140 countries. The global growth rate
of wealth tracked by this index is much lower than growth in GDP. In fact, the 2018 data
suggests natural capital declined for 140 countries for the period of 1992 to 2014.
This is the chart:
Again, I guess that's news to no one, except the Davos crowd.
But what's scary is the conclusion:
People deserve an accurate sense of how well their economies are performing, with a view
to long-term sustainability. GDP has and always will have valuable short-term insights, but
to respond to 21st-century pressures we need a modern economic measure.
At that point I wanted to scream. What we, apparently, need is a measure of how badly Davos
mentality is screwing things up. We don't need to heed the warnings. Or give up a growth
obsession that fuels globalization and is supported by the myth of profit maximization driving
well-being to which the whole of Davis subscribes. No, we just need a better measure of the
damage that myth causes.
Bring on the Green New Deal, I say.
Will it be on the Davos agenda? I doubt it, somehow.
Fully elucidated about a quarter century ago in an October, 1995 article in the Atlantic
– "If the GDP is Up, Why is America Down?" – by Clifford Cobb, Ted Halstead, and
Jonathan Rowe.
"Human capital" is a deceptive way of saying "buy low, sell high". As an employee, you are
bought for as little as possible, and sold for as much as possible, with Davos Man collecting
that difference, making him filthy rich off the sweat of your brow. When you can no longer
sweat for Davos Man, you are no longer human capital, and Davos Man would prefer you die
quietly, so he can enjoy his jets and yachts without looking at the wreckage left behind.
"GDP provides measurements of output, income and expenditure quite well, and these are
needed to understand and devise fiscal and monetary policies. But this measure flatly fails
when it comes to well being."
While I suspect birds instinctively understand the problem with fouling their nests, GDP
promoters seem not as instinctively aware.
Much of the GDP industrial "output" pushes the world ever closer to the climate change
tipping point, suggesting those promoting GDP growth don't realize the sign on much of their
favored metric is negative, not positive, when it comes to the well being of the earth and
its inhabitants.
And concern about "well being" should not be limited to humankind.
As Michael Hudson has pointed out GDP includes all sorts of figures that rightly should be
subtracted from economic output since they represent a cost, a drain on productivity as
opposed to actual production. Fees charged by financiers, monopoly prices extracted by big
pharma, ever-increasing rents, all these things make our economy more expensive, less
competitive, and less productive, They make us collectively poorer, not richer. Fix how GDP
is calculated and we'd see the truth behind the cheery numbers.
I've been curious about the disappearance of the old Gross National Product, replaced by
GDP I thought the word National was just too impolitic to use in a globalized world and of
course "national" implies a clearer view of sovereignty, etc. Probably had a tendency to
nationalize all natural resources and other things no longer tolerable to globalization.
I am curious if there was an ulterior motive when US switched from GNP to GDP in 1991;
does anyone know?
The United States used GNP as its primary measure of total economic activity until
1991, when it began to use GDP.[11] In making the switch, the Bureau of Economic Analysis
(BEA) noted both that GDP provided an easier comparison of other measures of economic
activity in the United States and that "virtually all other countries have already adopted
GDP as their primary measure of production".[12] Many economists have questioned how
meaningful GNP or GDP is as a measure of a nation's economic well-being, as it does not count
most unpaid work and counts much economic activity that is unproductive or actually
destructive.[13]
Human capital. This word as well as any other captures the dehumanizing nature of
capitalism. Just a factor of production. We don't have blood and bone and families. We have
exploitable skills. Screw that. Leave not one stone upon another when you rise up and destroy
the dystopian economy these swine have created.
So the most elite of the global elite have just now figured out that averages can be
skewed by extreme outliers? What any undergrad student in statistics could tell you? Man,
they're really selling the need for global hierarchies.
Dec 3, 2018
Joseph E. Stiglitz
What we measure affects what we do. If we focus only on material wellbeing – on, say, the production of goods,
rather than on health, education, and the environment – we become distorted in the same way that these measures
are distorted; we become more materialistic.
INCHEON – Just under ten years ago, the International
Commission on the Measurement of Economic Performance and Social Progress issued its report,
Mismeasuring Our Lives: Why GDP
Doesn't Add Up
.The title summed it up: GDP is not a good measure of wellbeing. What we measure affects
what we do, and if we measure the wrong thing, we will do the wrong thing. If we focus only on material wellbeing
– on, say, the production of goods, rather than on health, education, and the environment – we become distorted in
the same way that these measures are distorted; we become more materialistic.
We were more than pleased with the reception of our report,
which spurred an international movement of academics, civil society, and governments to construct and employ
metrics that reflected a broader conception of wellbeing. The OECD has constructed a
Better Life Index
,
containing
a range of metrics that better reflect what constitutes and leads to wellbeing. It also supported a successor to
the Commission, the High Level Expert Group on the Measurement of Economic Performance and Social Progress. Last
week, at the OECD's sixth World Forum on Statistics, Knowledge, and Policy in Incheon, South Korea, the Group
issued its report,
Beyond
GDP: Measuring What Counts for Economic and Social Performance
.
The new report highlights several topics, like trust and
insecurity, which had been only briefly addressed by
Mismeasuring Our Lives
, and explores several others,
like inequality and sustainability, more deeply. And it explains how inadequate metrics have led to deficient
policies in many areas. Better indicators would have revealed the highly negative and possibly long-lasting
effects of the deep post-2008 downturn on productivity and wellbeing, in which case policymakers might not have
been so enamored of austerity, which lowered fiscal deficits, but reduced national wealth, properly measured, even
more.
Political outcomes in the United States and many other
countries in recent years have reflected the state of insecurity in which many ordinary citizens live, and to
which GDP pays scant attention. A range of policies focused narrowly on GDP and fiscal prudence has fueled this
insecurity. Consider the effects of pension "reforms" that force individuals to bear more risk, or of labor-market
"reforms" that, in the name of boosting "flexibility," weaken workers' bargaining position by giving employers
more freedom to fire them, leading in turn to lower wages and more insecurity. Better metrics would, at the
minimum, weigh these costs against the benefits, possibly compelling policymakers to accompany such changes with
others that enhance security and equality.
Spurred on by Scotland, a small group of countries has now
formed the
Wellbeing Economy Alliance
. The hope is
that governments putting wellbeing at the center of their agenda will redirect their budgets accordingly. For
example, a New Zealand government focused on wellbeing would direct more of its attention and resources to
childhood poverty.
Better metrics would also become an important diagnostic tool,
helping countries both identify problems before matters spiral out of control and select the right tools to
address them. Had the US, for example, focused more on health, rather than just on GDP, the decline in life
expectancy among those without a college education, and especially among those in America's deindustrialized
regions, would have been apparent years ago.
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Likewise, metrics of equality of opportunity have only recently
exposed the hypocrisy of America's claim to be a land of opportunity: Yes, anyone can get ahead, so long as they
are born of rich, white parents. The data reveal that the US is riddled with so-called inequality traps: Those
born at the bottom are likely to remain there. If we are to eliminate these inequality traps, we first have to
know that they exist, and then ascertain what creates and sustains them.
A little more than a quarter-century ago, US President Bill
Clinton ran on a platform of "putting people first." It is remarkable how difficult it is to do that, even in a
democracy. Corporate and other special interests always seek to ensure that their interests come first. The
massive US tax cut enacted by the Trump administration at this time last year is an example,
par excellence
.
Ordinary people – the dwindling but still vast middle class – must bear a tax increase, and millions will lose
health insurance, in order to finance a tax cut for billionaires and corporations.
If we want to put people first, we have to know what matters to
them, what improves their wellbeing, and how we can supply more of whatever that is. The
Beyond GDP
measurement agenda will continue to play a critical role in helping us achieve these crucial goals.
"... You said that we're entering into a recession. That's just the flat wrong statement. The economy's been in a recession ever since 2008, as a result of what President Obama did by bailing out the banks and not the economy at large. ..."
"... The largest element of fakery is a category that is imputed – that is, made up – for rising rents that homeowners would have to pay if they had to rent their houses from themselves. That's about 6 percent of GDP right there. Right now, as a result of the 10 million foreclosures that Obama imposed on the economy by not writing down the junk mortgage debts to realistic values, companies like Blackstone have come in and bought up many of the properties that were forfeited. So now there are fewer homes that are available to buy. Rents are going up all over the country. Homeownership has dropped by abut 10 percent since 2008, and that means more people have to rent. When more people have to rent, the rents go up. And when rents go up, people lucky enough to have kept their homes report these rising rental values to the GDP statisticians. ..."
"... The other great jump in GDP has been people paying more money to the banks as penalties and fees for arrears on student loans and mortgage loans, credit card loans and automobile loans. When they fall into arrears, the banks get to add a penalty charge. The credit-card companies make more money on arrears than they do on interest charges. This is counted as providing a "financial service," defined as the amount of revenue banks make over and above their borrowing charges. ..."
"... The statistical pretense is that they're taking the risk on making loans to debtors that are going bad. They're cleaning up on profits on these bad loans, because the government has guaranteed the student loans including the higher penalty charges. They've guaranteed the mortgages loans made by the FHA – Fannie Mae and the other groups – that the banks are getting penalty charges on. So what's reported is that GDP growth is actually more and more people in trouble, along with rising housing costs. What's good for the GDP here is awful for the economy at large! This is bad news, not good news. ..."
Paul Sliker: So, Michael, over the past few months the IMF has been sending warning
signals about the state of the global economy. There are a bunch of different macroeconomic
developments that signal we could be entering into another crisis or recession in the near
future. One of those elements is the yield curve, which shows the difference between short-term
and long-term borrowing rates. Investors and financial pundits of all sorts are concerned about
this, because since 1950 every time the yield curve has flattened, the economy has tanked
shortly thereafter.
Can you explain what the yield curve signifies, and if all these signals I just mentioned
are forecasting another economic crisis?
Michael Hudson: Normally, borrowers have to pay only a low rate of interest for a
short-term loan. If you take a longer-term loan, you have to pay a higher rate. The longest
term loans are for mortgages, which have the highest rate. Even for large corporations, the
longer you borrow – that is, the later you repay – the pretense is that the risk is
much higher. Therefore, you have to pay a higher rate on the pretense that the interest-rate
premium is compensation for risk. Banks and the wealthy get to borrow at lower rates.
Right now what's happened is that the short-term rates you can get by putting your money in
Treasury bills or other short-term instruments are even higher than the long-term rates. That's
historically unnatural. But it's not really unnatural at all when you look at what the economy
is doing.
You said that we're entering into a recession. That's just the flat wrong statement. The
economy's been in a recession ever since 2008, as a result of what President Obama did by
bailing out the banks and not the economy at large.
Since 2008, people talk about "look at how that GDP is growing." Especially in the last few
quarters, you have the media saying look, "we've recovered. GDP is up." But if you look at what
they count as GDP, you find a primer on how to lie with statistics.
The largest element of fakery is a category that is imputed – that is, made up
– for rising rents that homeowners would have to pay if they had to rent their houses
from themselves. That's about 6 percent of GDP right there. Right now, as a result of the 10
million foreclosures that Obama imposed on the economy by not writing down the junk mortgage
debts to realistic values, companies like Blackstone have come in and bought up many of the
properties that were forfeited. So now there are fewer homes that are available to buy. Rents
are going up all over the country. Homeownership has dropped by abut 10 percent since 2008, and
that means more people have to rent. When more people have to rent, the rents go up. And when
rents go up, people lucky enough to have kept their homes report these rising rental values to
the GDP statisticians.
If I had to pay rent for the house that I have, could charge as much money as renters down
the street have to pay – for instance, for houses that were bought out by Blackstone.
Rents are going up and up. This actually is a rise in overhead, but it's counted as rising GDP.
That confuses income and output with overhead costs.
The other great jump in GDP has been people paying more money to the banks as penalties
and fees for arrears on student loans and mortgage loans, credit card loans and automobile
loans. When they fall into arrears, the banks get to add a penalty charge. The credit-card
companies make more money on arrears than they do on interest charges. This is counted as
providing a "financial service," defined as the amount of revenue banks make over and above
their borrowing charges.
The statistical pretense is that they're taking the risk on making loans to debtors that
are going bad. They're cleaning up on profits on these bad loans, because the government has
guaranteed the student loans including the higher penalty charges. They've guaranteed the
mortgages loans made by the FHA – Fannie Mae and the other groups – that the banks
are getting penalty charges on. So what's reported is that GDP growth is actually more and more
people in trouble, along with rising housing costs. What's good for the GDP here is awful for
the economy at large! This is bad news, not good news.
As a result of this economic squeeze, investors see that the economy is not growing. So
they're bailing out. They're taking their money and running.
If you're taking your money out of bonds and out of the stock market because you worry about
shrinking markets, lower profits and defaults, where are you going to put it? There's only one
safe place to put your money: short-term treasuries. You don't want to buy a long-term Treasury
bond, because if the interest rates go up then the bond price falls. So you want buy short-term
Treasury bonds. The demand for this is so great that Bogle's Vanguard fund management company
will only let small investors buy ten thousand dollars worth at a time for their 401K
funds.
The reason small to large investors are buying short term treasuries is to park their money
safely. There's nowhere else to put it in the real economy, because the real economy isn't
growing.
What has grown is debt. It's grown larger and larger. Investors are taking their
money out of state and local bonds because state and local budgets are broke as a result of
pension commitments. Politicians have cut taxes in order to get elected, so they don't have
enough money to keep up with the pension fund contributions that they're supposed to make.
This means that the likelihood of a break in the chain of payments is rising. In the United
States, commercial property rents are in trouble. We've discussed that before on this show. As
the economy shrinks, stores are closing down. That means that the owners who own commercial
mortgages are falling behind, and arrears are rising.
Also threatening is what Trump is doing. If his protectionist policies interrupt trade,
you're going to see companies being squeezed. They're not going to make the export sales they
expected, and will pay more for imports.
Finally, banks are having problems of they hold Italian government bonds. Germany is
unwilling to use European funds to bail them out. Most investors expect Italy to do exit the
euro in the next three years or so. It looks like we're entering a period of anarchy, so of
course people are parking their money in the short term. That means that they're not putting it
into the economy. No wonder the economy isn't growing.
California – $2.751 trillion
Texas – $1.707 trillion
Russia – $1.578 trillion
Likbez:
@Winston July 28, 2018 at 10:00 am
Cult of GDP is a damaging mental disease. With the size of the USA financial sector it is grossly distorted.
The inflated costs of pharmaceutical and medical-industrial complex add another large portion of air into the US GDP.
Surveillance Valley (Amazon, Apple, Facebook, Google, Microsoft, etc ) firms valuations are also inflated and their
contribution to the USA economics is overestimated in GDP.
There is also such thing as purchase parity. To compare GDP between countries, you must use purchasing power parity. To
compare GDP without calculating in purchasing parity is just naïve.
I suspect that in real purchasing power Russia is close to Germany (which means it it is the fifth largest economy)
The USA still has dominance is key technologies and cultural influence.
Example with GDP growth after natural disaster is pretty illuminating...
Notable quotes:
"... GDP = Consumption + Investment + Government Spending + Net Exports ..."
"... or more succinctly ..."
"... GDP = C + I + G + NX ..."
"... where consumption (C) represents private-consumption expenditures by households and nonprofit organizations, investment (I) refers to business expenditures by businesses and home purchases by households, government spending (G) denotes expenditures on goods and services by the government, and net exports (NX) represents a nation's exports minus its imports. ..."
"... Here's Dave's explanation: ..."
"... Once I learned about accounting, I figured out why the GDP metric wasn't sufficient. What is missing? ..."
"... The balance sheet. ..."
"... Hurricanes are a direct hit to your nation's balance sheet. The national income statement goes up because of increased spending to replace lost assets, but the "equity" part of the national balance sheet ends up taking a hit in direct proportion to the damage that occurred. Even if you rebuild everything just the way it was, your assets remain the same, while your liabilities have increased. ..."
"... We know this because we use the balance sheet equation: equity = assets – liabilities. Equity is another word for wealth. ..."
"... After hurricane, you rebuild your house, and buy a new car, using borrowed money: ..."
"... wealth = (house + car) – (2 x home debt + 2 x car debt) ..."
"... Wealth (equity) has declined by the sum (home debt + car debt) ..."
"... So when you see pictures of a hurricane strike, you can now look through all that devastation and see the impact on the balance sheet. National equity (wealth) just dropped by the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn't actually matter; that equity is just gone. Destruction is always a downside for equity – even if there is a temporary positive impact on the income statement. ..."
"... Isn't it interesting that the mainstream economists, who don't use banks, debt, or money in their models, largely ignore balance sheets and instead just looks at the income statement alone? Its almost as if the entire education system was organized so that people paid no attention to banks, debt, and money. Who do you think might benefit from our flock of PhD economists ignoring the extremely profitable debt-elephant in the room, and its purveyors, the banks? ..."
"... without resistance from academics whom those aristocrats likewise finance ..."
Gross Domestic Product, or GDP, is the most commonly used measure and ranking of a nation's
economy. According to the OECD and Wikipedia, its definition is: "an aggregate measure of
production equal to the sum of the gross values added of all resident and institutional units
engaged in production (plus any taxes, and minus any subsidies, on products not included in the
value of their outputs) " No subtractions are included in it for debts that were undertaken in
order to generate the given "gross values added." A trillion dollars of increased assets
(additional "gross values" of "production") adds a trillion dollars to GDP, even if all of it
was produced by increasing the debts by a trillion dollars: only the assets-side of the
balance-sheet is relevant to GDP.
However, wealth is assets minus liabilities; it is assets minus debts; it is not
assets alone. Therefore, a nation's wealth has no necessary relationship at all to a nation's
GDP, because the nation's wealth is its assets minus its liabilities, not its assets
regardless of its liabilities (such as GDP is).
Britannica
provides this definition of "GDP" : "Gross domestic product (GDP), total market value of
the goods and services produced by a country's economy during a specified period of time. It
includes all final goods and services -- that is, those that are produced by the economic
agents located in that country regardless of their ownership and that are not resold in any
form. It is used throughout the world as the main measure of output and economic activity." In
this definition, too, no subtractions are included in it for the debts. Britannica then goes on
to state:
GDP = Consumption + Investment + Government Spending + Net Exports
or more succinctly
GDP = C + I + G + NX
where consumption (C) represents private-consumption expenditures by households and
nonprofit organizations, investment (I) refers to business expenditures by businesses and home
purchases by households, government spending (G) denotes expenditures on goods and services by
the government, and net exports (NX) represents a nation's exports minus its imports.
Kimberly
Amadeo at "The Balance" uses that definition , and opens her article about GDP by saying:
"Gross domestic product is the best way to measure a country's economy. GDP is the total value
of everything produced by all the people and companies in the country. It doesn't matter if
they are citizens or foreign-owned companies. If they are located within the country's
boundaries, the government counts their production as GDP."
However: is GDP, in fact , "the best way to measure a country's economy"? If you're
a banker whose income is derived from having a lot of money owed to you, then, of course, you
will want to fool the public into believing that ignoring debts that were incurred in producing
a given GDP is "the best way to measure a country's economy," because the more fools that
believe it, the more income you will make, because people won't be measuring their
economic welfare by deducting from it the debts they owe. They will be deceived to
think their country to be in better economic and financial position than it is, if the debts
that it incurs are being ignored; this ignoring of debt in the ranking of nations' economies
will make easier a government's taking on more debt than it should.
Roy H. Webb, of the Richmond Fed, headlined in 1994,
"The National Income and Product Accounts" and he presented there a lengthy breakdown of
how GDP is calculated, but, yet again, nowhere in that article did any form of the terms "debt"
or "liability" appear.
Isn't it obvious, that GDP is a fraud -- and a very influential one?
MBA-Tutorials has an article "Shortcomings of GDP"
, but it, too, doesn't mention, in any form, "debts" or "liabilities"; and, so, it, too, is
fake.
Bob McTeer, former President of the Dallas Fed, headlined in Forbes on 31 October 2012,
"Hurricane Sandy And The
Shortcomings Of GDP" , and he opened: "Natural disasters, like Hurricane Sandy, provide
periodic reminders, not of the shortcomings of GDP necessarily, but what GDP is designed to
measure and what it is not designed to measure." In other words: the bankers excuse GDP because
"it is not designed to measure" what it is being routinely used to measure. If the
ordinary-language meaning of "GDP" is devoid of the liabilities-side of the balance-sheet, and
ranks nations' economic performance in that way -- by ignoring any additional indebtedness that
went into generating that additional "production" -- then what language was Dr. McTeer even
writing in, there (since it wasn't ordinary language -- language as it's commonly understood)?
That statement by McTeer, too, therefore, is deceit. In the rest of his article, he blathers
on. And, nowhere in that article, either, are the words "debts" or "liabilities" used, in any
form.
Deceit regarding GDP is routine, just as such a fake 'misuse' of "GDP" is routine. (It's
really no "misuse" of the term, at all.) GDP is designed to be a misleading basis for ranking
the economic performance of countries; it's used for the purpose it's intended for, because the
purpose it's intended for is to deceive the public in this very way -- to ignore debt -- and,
so, that's the way it's used.
However, Charles Hugh Smith, at several blogs, explained the matter honestly, instead of (as
is normally done) as a representative of the debt-industries, when he headlined on 19 October
2017, "GDP Is Bogus: Here's Why" ,
and he presented there a superbly clear example, which applies not only to Hurricane Sandy, but
to any natural disaster or war, and thus (by implication) constitutes a threat to not only the
debt-industries (the financial firms), but also the man-made-disaster industries (the
war-firms), such as Dwight Eisenhower famously (but only vaguely) referred to in his final
words parting from the White House and handing it over to JFK in 1961, as "the
military-industrial complex," against which Eisenhower vaguely was warning there.
Charles Hugh Smith's example, much clearer than McTeer's blather, had allegedly come from
some accountant, "Dave," and presented (without linking to) the following:
Here's Dave's explanation:
Once I learned about accounting, I figured out why the GDP metric wasn't sufficient.
What is missing?
The balance sheet.
Hurricanes are a direct hit to your nation's balance sheet. The national income
statement goes up because of increased spending to replace lost assets, but the "equity" part
of the national balance sheet ends up taking a hit in direct proportion to the damage that
occurred. Even if you rebuild everything just the way it was, your assets remain the same,
while your liabilities have increased.
We know this because we use the balance sheet equation: equity = assets –
liabilities. Equity is another word for wealth.
Before hurricane:
wealth = (house + car) – (home debt + car debt)
After hurricane, you rebuild your house, and buy a new car, using borrowed
money:
wealth = (house + car) – (2 x home debt + 2 x car debt)
Wealth (equity) has declined by the sum (home debt + car debt)
So when you see pictures of a hurricane strike, you can now look through all that
devastation and see the impact on the balance sheet. National equity (wealth) just dropped by
the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn't actually
matter; that equity is just gone. Destruction is always a downside for equity – even if
there is a temporary positive impact on the income statement.
Isn't it interesting that the mainstream economists, who don't use banks, debt, or money
in their models, largely ignore balance sheets and instead just looks at the income statement
alone? Its almost as if the entire education system was organized so that people paid no
attention to banks, debt, and money. Who do you think might benefit from our flock of PhD
economists ignoring the extremely profitable debt-elephant in the room, and its purveyors, the
banks?
By means of deceits such as using false measures of nations' economic performance, like
that, the aristocracy and its agents, in all countries -- the owners of banks like HSBC, and of
'defense' contractors like Lockheed Martin, etc. -- can, and do, without resistance from
academics whom those aristocrats likewise finance , use fake 'measures' of nations'
economic performance, so as to advance their own private economic performances, by fooling
their narcoticized public into accepting these economic and financial bloodsuckers, accepting
them by ignoring whatever blood might be lost in the process. Or: are they, too, merely fools?
They function more like vampires, than like fools. But, apparently, the victims -- here, the
public -- just don't awake from this bite, and, so, it will probably continue until the next
great economic crash, after which, yet again, the government will go into still more debt, in
order to 'recover' from these 'mistakes'. That sounds like a good business to be in -- a stable
business, of the "heads I win, tales you lose" type. It might not be irresistible, but no one
is resisting it. Now, why would that be?
"... "Here is my two cents: these three researchers may have just put the nail in the coffin of using production-side measures of the free economy-and that is not really all that bad. GDP is a measure of total production. It was ever meant to be a measure of how well-off society has become. ..."
"... While introduction of the concept of GDP and systematic its measurement (with all its warts, especially in calculation of "real GDP") was a great achievement, absolutization of GDP under neoliberalism and, especially, false equivalence between GDP growth and growth of the standard of living of population are dangerous neoliberal myths. ..."
"... We should fight neoliberal cult of GDP. ..."
"... Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what. ..."
Interesting post at Digitopoly by Shane Greenstein
"Here is my two cents: these three researchers may have just put the nail in the coffin
of using production-side measures of the free economy-and that is not really all that bad. GDP
is a measure of total production. It was ever meant to be a measure of how well-off society has
become.
More to the point, maybe it is time to focus on the demand-side measures of free goods. In
other words, you get a lot more for your Internet subscription, but nothing in GDP reflects that.
For example, the price index for Internet services should reflect qualitative improvement in user
experiences, and needs to improve."
While introduction of the concept of GDP and systematic its measurement (with all its warts,
especially in calculation of "real GDP") was a great achievement, absolutization of GDP under
neoliberalism and, especially, false equivalence between GDP growth and growth of the standard
of living of population are dangerous neoliberal myths.
We should fight neoliberal cult of GDP.
Simon Kuznets, the economist who developed the first comprehensive set of measures of national
income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses
of National Income Measurements":
The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative
measurements especially, the definiteness of the result suggests, often misleadingly, a precision
and simplicity in the outlines of the object measured. Measurements of national income are subject
to this type of illusion and resulting abuse, especially since they deal with matters that are
the center of conflict of opposing social groups where the effectiveness of an argument is often
contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity are
just as important when income measurements are interpreted from the point of view of economic
welfare. But in the latter case additional difficulties will be suggested to anyone who wants
to penetrate below the surface of total figures and market values. Economic welfare cannot be
adequately measured unless the personal distribution of income is known. And no income measurement
undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of
effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred
from a measurement of national income as defined above.
In 1962, Kuznets stated:
Distinctions must be kept in mind between quantity and quality of growth, between costs
and returns, and between the short and long run. Goals for more growth should specify more growth
of what and for what.
Did the rise of free information technology improve GDP? It is commonly assumed that it did.
After all, the Internet has changed the way we work, play, and shop. Smartphones and free apps
are ubiquitous. Many forms of advertising moved online quite a while ago and support gazillions of
"free" services. Free apps changed leisure long ago-just ask any teenager or any parent of a teenager.
Shouldn't that add up to a lot?
Think again. The creation of the modern system of GDP economic accounting was among the greatest
economic inventions of the 20th century. Initially created in the US and Britain, this system has
been improved for decades, and, for all intents and purposes, it is the system in every modern government
around the world today.
Although this system contains some flexibility, it also has its rigidities, especially when it
comes to free services. I expect the answer to sit awkwardly with most readers. Nonetheless, a little
disciplined thinking yields a few insights about the modern experience, and that is worth the effort.
... ... ...
This was an obvious problem when commercial television first spread using advertising as its primary
revenue source. The consumption is free, and the only revenue comes from advertising. When the TV
experience improved- say, as it moved from black and white to color - GDP recorded only the revenue
for television sets and advertising, not the user experience.
There was hope that industry specialists would find some underlying proportional relationship
between consumption of services and advertising revenue-for example, between the time watching TV
and the value of watching commercials. Such proportionality would have been very handy for economic
accounting, because it would yield an easy proxy for improvement in the quality of services. Accountants
would merely have to examine improvement in advertising revenue.
Alas, no such relationship could be found. Just look at the history of television to understand
why. Television has gotten much better over the last few decades, but-for many reasons-total advertising
has not grown. The economics is just not that simple.
A similar problem has arisen today. Search engines attract users, and that generates tens of billions
of dollars of revenue from advertisers, and that revenue contributes to GDP. However, the services
delivered by search contribute no revenue and, by definition, contribute nothing to GDP. With so
many free services today, this weakness in GDP accounting seems awkward. It does not matter how amazing
the services are, nor how much they have improved over time. Any improvement in the quality of search
services is not a contribution in GDP except insofar as it generates more advertising dollars.
Recently, three professional economists- Leonard Nakamura, Jon Samuels, and Rachel Soloveichik-tried
to wade into this topic again, and tried something experimental and novel. They wondered how GDP
would change if these free services were reconceived as a barter.
A good way to try and quantify the value of free goods/services is to estimate (as best as
one can) how those goods/services make us healthier and/or live longer active lives. A solution
free environment and public parks are good examples of free services that make us healthier. In
principle, the social media (e.g., Facebook) and voluntary work could reduce social alienation,
and make people healthier.
On the other hand, some goods/services that contribute to the GDP can have negative effects
on health & wellbeing – e.g., gambling.
The same list tells me that Saudi Arabia had a greater GDP than Sweden, Belgium,
Norway and Denmark did in 2015. But does this information tell us anything about the
health or long-term prospects for the Saudi economy compared to the economies of the
other countries I just mentioned? Does the information tell us how well average Saudi
citizens live compared to how well the average citizen lives in Sweden? Does the
information say anything about what Saudi Arabia produces and/or exports, and about the
range of products the KSA makes, compared to what Sweden does?
I'm sure you can do better than come up with a stack of numbers and nothing else that
explains or qualifies them.
Oh and BTW, most labour migration between Russia and other countries is made up of
Central Asian migrants travelling to Russia to work in construction and other jobs
requiring little or no technical skills, or to study in the country's universities, and
going back home to visit family on special occasions (like Persian New Year) or help
gather in local harvests. Money flows in the form of remittances between Russia and
Central Asian countries like Uzbekistan and Tajikistan tend to be out of Russia and into
those other countries.
@61. So GDP is a measure of what is produced in the country. GNP adds or subtracts from
it money that is sent from elsewhere. Russia with a significantly larger GNP compared to
GDP is a net recipient of income inflow, the Central Asian migrants not withstanding.
There are two potential problems with higher GNP. Firstly, Taxes on the income being
sent have been paid in a different country. So for example the millions of Mexicans who
send money from US to Mexico pay their taxes in US. The Mexican government does not see
any of that revenue. Secondly the money coming is primarily spent via consumption. While
this may help the local economy a little bit there is also demand for more
infrastructure to support this added consumption but the government is not getting
revenue to address this need for greater infrastructure and is always trying to play
catch up.
Most countries with higher GNP (compared to GDP) continue to have weak economies
susceptible to the ravages of the World economy. Russia is no exception. A weak economy
cannot support a strong military without significantly sacrificing spending for
improving it citizens well being. There are a number of countries maintaining large
armies (for various reasons) that are disproportionate compared to their economic power.
Russia is an extreme case of this. And the Russian citizens suffer because of this.
Russia has an economy that is smaller than that of South Korea, smaller than
Canada, smaller than Italy.
On the basis of
purchasing power parity (PPP)
, Russia has an economy that is more than TWICE that of
South Korea or Canada and 61% greater than Italy's.
The Russian economy is about 20%
that of USA but the Russian per capita GDP economy grew faster than USA, Canada, or
Italy from 1990-2015.
<> <> <> <> <> <> <> <> <> <>
2015 per capita, adjusted for PPP multipled by current population (from Wikipedia):
Some interesting notes about difficulty of comparing GDP of various countries, in this case the
USA and Russia.
Notable quotes:
"... Russia's overall GDP PPP places it slightly below Germany - 6th place in the world ..."
"... But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests. ..."
"... Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget. ..."
"... [AKA "SmoothieX12"] ..."
"... No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. ..."
"... In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition. ..."
Russia spent almost 5.4% of GDP on military spending. The US last year spent 3.3% and with Trump's
proposed increase this number will increase by a few decimal points.
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita. If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke.
Goods and services in Russia are considerably less expensive than in the West (and this includes
the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator
than is nominal GDP. In terms of GDP PPP, Russia is of course not on par with the United States
but is considerably higher than Mexico. It is in the same neighborhood as places such as Hungary.
Russia's overall GDP PPP places it slightly below Germany - 6th place in the world
:
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita.
But the US GDP is of an different structure. Compared it is overblown with pure financial
sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday
things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to
conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld
some stress tests.
If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke
No country that relies on oil ( Russia do not) has made substantial improvements. Normally
they are problem states where the problems made by oil are solved by money.
So from my point of view the opposite is true. Russia has made the big mistake to open itself
to the west and was bitten. Now they readjust (with a border to china). Thank's to the US Oligarchs
which thrown away that chance for they're primitive Neanderthal tribe thinking.
Over the years, the Pentagon encouraged Congress to move parts of national security spending
out of its budget to the extent that almost half is found outside the DOD. The USA really spends
over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and
maintenance is found in the Dept of Energy budget.
And as others have noted, GDP is a measure of activity, not prosperity. For example, mortgage
refinancing creates lots of GDP, but no real wealth. Hurricanes and arson are good for GDP too!
Stupid beyond belief. Countries can't go broke doing something, if they control the natural and
human resources they need to accomplish it. In addition, you apparently did not read Smoothie's
explanation of why just comparing the sums spent is silly.
"Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita." this is very funny, how about the 20 trillions of US national debt and it is skyrocketing
fast? If you only count asset without counting liability US maybe in the top 10 GDP per capita,
but if you count net asset the US is in the negative GDP per capita, a broke nation. Perhaps it
is American Exceptionalism logic, claiming credit where credit is not due, living in a world detached
from reality.
"If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke." this is even funnier, Russian does not use USD in
Russia, nor Russian government pay its MIC in USD, meanwhile Russian Central Bank can print Ruble
thru the thin air just like the Fed, why does oil price have any relationship with Russian internal
spending? Another example of "completely triumphalist and detached from Russia's economic realities"
which is defined by meaningless Wall Street economic indices and snakeoil economic theories and
rhetoric taught in the western universities.
P.S. No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it
is a creative bookkeeping and most of it is financial and service sector. Out of very few
good things Vitaly Shlykov left after himself was his "The General Staff And Economics", which
addressed the issue of actual US military-industrial potential.
Then come strategic, operational and technological dimensions. You want to see operational
dimension -- look no further than Mosul which is still, after 6 months, being "liberated". Comparisons
to Aleppo are not only warranted but irresistible.
In general, overall power of the state (nation) is not only in its "economic" indices.
I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in
the General Staff Academy uses virtually identical definition.
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point–structure of GDP. ..."
"... In general, we speak here different languages and I may only refer you back to Michael Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the process of US literally running out of resources and no amount of "raised capital" can change it. This is not to speak about the whole house of cards of Pax Americana which rested on US military imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it) the house of cards folds. ..."
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure of GDP. ..."
"... You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is "output", of course, remains a complete mystery, same as many other services, once one considers the "quality" of education in US public schools which reflects in the most profound way on US labor force which increasingly begins to look like a third world one. ..."
@inertial
You just illustrated my point. Facebook vs. Gazprom market caps - all that shows is that Facebook
has access to vastly larger amounts of capital than Gazprom. Well, duh.
Market capitalization is determined mostly by institutional investors - mutual funds, pension
funds, insurance companies, etc. - who pool private savings and channel them into various investments.
There are massive amounts of such savings available in USA; in Russia, not so much.
In Russia, the government is just about the only major saver and investor. This works fine
in areas where the government must play a role, such as weapons manufacture. In other areas,
enterprises that need capital to develop must either accumulate it themselves over the years
(which puts limit on growth,) or get the government to help them out, or borrow abroad at usurious
rates. That's not good. Ideally, Russian enterprises should enter Russian stock or fixed income
market and raise as much capital as they need.
As for Boeing, yes it's a gem. But it does have some difficulties in raising capital. It's
been balancing on the edge of bankruptcy for years and, unlike Facebook, it has huge liabilities.
Incidentally, Boeing very much engages in all that "useless" high finance stuff. The buy and
sell and issue bonds and short term paper; I don't know if they issue options but they certainly
trade them. They don't believe that they are performing "virtual transactions with virtual
money;" on the contrary, they consider this and essential part of the business, as important
as building engines or whatever. Perhaps they know something you don't?
Finally, a tip. Any "expert" who doesn't treat US (or other) economic data seriously is an
idiot.
Market capitalization is determined mostly by institutional investors – mutual funds, pension
funds, insurance companies, etc. – who pool private savings and channel them into various investments.
There are massive amounts of such savings available in USA; in Russia, not so much.
Sure, and that is why a company which produces nothing of value "commands" the so called
"investments" which are several times larger than those of Boeing who is de facto US national
treasure and who, as you stated, has problems with raising "capital". That pretty much says it
all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely
the point–structure of GDP.
You may go here and see for yourself how FIRE overtook manufacturing in US in output.
What is "output", of course, remains a complete mystery, same as many other services, once one
considers the "quality" of education in US public schools which reflects in the most profound
way on US labor force which increasingly begins to look like a third world one.
In general, we speak here different languages and I may only refer you back to Michael
Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly
the process of US literally running out of resources and no amount of "raised capital" can change
it. This is not to speak about the whole house of cards of Pax Americana which rested on US military
imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it)
the house of cards folds.
Ondrej , April 18, 2017 at 3:20 pm GMT
@Andrei Martyanov
Market capitalization is determined mostly by institutional investors – mutual funds, pension
funds, insurance companies, etc. – who pool private savings and channel them into various investments.
There are massive amounts of such savings available in USA; in Russia, not so much.
Sure, and that is why a company which produces nothing of value "commands" the so called "investments"
which are several times larger than those of Boeing who is de facto US national treasure and who,
as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit
here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure
of GDP.
You may go here and see for yourself how FIRE overtook manufacturing in US in output. What
is "output", of course, remains a complete mystery, same as many other services, once one considers
the "quality" of education in US public schools which reflects in the most profound way on US
labor force which increasingly begins to look like a third world one.
In general, we speak here different languages and I may only refer you back to Michael Lind's
quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the
process of US literally running out of resources and no amount of "raised capital" can change
it. This is not to speak about the whole house of cards of Pax Americana which rested on US military
imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it)
the house of cards folds. Maybe this would help to someone:-)
„Excluding as we do noncapitalist change, we have to define that word which good economists
always try to avoid : capitalism is that form of private property economy in which innovations
are carried out by means of borrowed money, which in general, though not by logical necessity,
implies credit creation. A society, the economic life of which is characterized by private property
and controlled by private initiative, is according to this definition not necessarily capitalist,
even if there are, for instance, privately owned factories, salaried workers, and free exchange
of goods and services, either kind or through the medium of money. The entrepreneurial function
itself is not confined to capitalist society, since such economic leadership as it implies would
be present, though in other forms, even in a primitive tribe or in a socialist community." (Schumpeter
1939, 216)
This means that in perfect equilibrium interest would be zero in the sense that it would not
be a necessary element of the process of production and distribution, or that pure interest tends
to vanish as the system approaches perfect equilibrium. Proof of this proposition is very laborious,
because it involves showing why all the theories which lead to a different result are logically
unsatisfactory.
Hence, the money market with all that happens in it acquires for us a much deeper significance
than can be attributed to it from the standpoint just glanced at. It becomes the heart, although
it never becomes the brain, of the capitalist organism (Schumpeter 1939)
== quote == In much of the world, of course, electricity demand is still growing. In China, per-capita electricity
use has more than quadrupled since 1999. Still, most other developed countries have experienced
a plateauing or decline in electricity use similar to that in the U.S. over the past decade. And
while the phenomenon has been most pronounced in countries such as the U.K. where the economy
has been especially weak, it's also apparent in Australia, which hasn't experienced a recession
since 1991. == end of quote ==
From comments:
One interesting data point that should be within that "industrial" number: "U.S. aluminum production
has gone from 2.5 million tons in 2005 to 1.6 million in 2015."
http://www.seattletimes.com...
Aluminum smelting uses a lot of electricity, and that's a 36% decline. I'm not sure of the
total electricity use of the aluminum industry in the U.S. but it's conceivably big enough to
make a difference in that last graph.
(Bloomberg)
... In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy
researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech
historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had
decoupled from economic growth (which I've paraphrased here):
In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy
researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech
historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had
decoupled from economic growth (which I've paraphrased here):
1.State and federal efficiency standards for buildings and appliances have enabled us to get by
with less electricity.
2.Increased use of information and communications technologies have also allowed people to conduct
business and communicate more efficiently.
3.Higher prices for electricity in some areas have depressed its use.
4.Structural changes in the economy have reduced demand.
5.Electricity use is being underestimated because of the lack of reliable data on how much energy
is being produced by rooftop solar panels. ...
I appreciate these conjectures or hypotheses, which I had read initially and should have set down
as well. The problem is there is no clear defining of the hypotheses, or provision for coming
to a tentative conclusion as to the effect of any hypothesis.
The matter is of course important, and I will welcome further consideration.
GDP is a classic junk science, some sort of 'economic Lysenkoism" and "cult of GDP is an immanent
feature of neoliberal propaganda designed to substitute arbitrary metric for more scientific measurements
of the wellbeing of people. That's a neoliberal lie: "That's why per capita GDP is one of the
strongest predictors
of happiness measured through people's subjective perceptions of their well-being. "
And it is generally connected strongly only with well being of financial oligarchy, which in the
USA is at all time high. Preetty much disconned with well being of ordinary people as declining
wages signify in the USA>
Economists have long argued that the gross domestic product has many flaws as a measure of well-being
and policy success. Yet there's a good reason it's still being used: There's a certain magic to it,
despite its science being somewhat iffy.
On Monday, the National Bureau of Economic Research published a
paper by Harvard economist Martin Feldstein
detailing an argument he has been making for years -- that GDP calculations underestimate actual
growth and productivity. This optimistic argument is based on the difficulty of measuring changes
in the quality of products and services, and therefore of life. Feldstein points out, for example,
that official measurements, for the most part, only catch quality improvements if a product or service
requires more expensive inputs: "If it doesn't cost more to produce a product or service this year
than it did last year, there has been no improvement." That way, for example, leaps in the quality
of health care -- when a patient who used to need a week in hospital to recover from a cataract operation
is now discharged on the day of the procedure -- are not measured. The way official statistics measure
the introduction of new products, too, doesn't account for their actual contribution to consumers'
well-being or to the economy as a whole.
According to Feldstein, government messaging should be more optimistic to make sure people understand
that their savings will buy more in the future. Goods and services are improving lives more than
price increases would indicate.
Nobel laureate Joseph Stiglitz has long held the
opposite view -- that the GDP as measured today may overestimate well-being. For example, it
counts any increase in government spending as positive, even though these increases may be inefficient
or even counterproductive. And as for those improvements in health care quality that form the basis
of Feldstein's argument, they, too, can be overestimated in the U.S. because health care spending
there is higher than other countries while the outcomes are the same or worse.
Some recent work also argues against the theory, supported by Feldstein, that the recent productivity
slowdown is due to a failure of measurement. Last year, Chad Syverson of the University of Chicago
pointed out that even the most generous estimates of the value added by the growth in digital
technology aren't big enough to bring productivity growth to its pre-2004 trajectory. Another
analysis by International Monetary Fund economist Marshall Reinsdorf found that their unmeasured
effect on productivity could only be small. Statistics fail to record some of the added value because
of the tech sector's use of tax havens, he wrote. But even the "free" internet services provided
now are counted through the advertising they attract. And some of the improvements that tech created
for consumers don't belong in the GDP calculation in the first place: If they save a user some personal
time, that stays in the home and doesn't affect economic activity. (Even if it did, it might be canceled
out by the time our digital addictions take out of our productive workday.)
All the back and forth about how GDP is calculated is only possible because, despite all the flaws,
the measure somehow ends up feeling right. The distortions often end up canceling themselves out.
In 2013, Nicholas Oulton of the London School of Economics' Center for Economic Performance wrote
a paper to disprove the notion that U.K. economic growth had been overestimated because official
calculations overstated the contribution of banking to GDP. He showed that "if banking output has
been overstated, then the output of some other industry or industries must have been understated."
Earlier this year, a team of IMF economists
attempted to figure out how GDP numbers would have changed for a number of developed countries
had they used an outdated deflation method, still used by China and India. It turned out that the
effects wouldn't have been consistently negative or positive for most countries; for Western European
countries, on aggregate, the effects would have been small. The team's recommendation was that more
countries adopt the more progressive deflation methods now used by most of the G20 -- but their research
made it clear that in some cases the difference in the results would be tiny.
As much as GDP calculation isn't an exact science , the results usually make sense. That's
why per capita GDP is one of the
strongest predictors
of happiness measured through people's subjective perceptions of their well-being.
It's fine to argue for better measures of well-being. These measures, however, add even harder-to-measure
indicators, such as levels of social support, freedom and generosity. For many countries, these data
are either unavailable or subjectively colored. The choice is between engineering and science: The
former will accept an imperfect approximation, while the latter will always strive for perfection.
As Federal Reserve Chair Janet Yellen recently pointed out, GDP is "a pretty noisy indicator"
at best. Yet it remains extremely useful as a reference.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and
its owners.
"... With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...] ..."
People like you pray on the altar of GDP growth, don't they?
Look at the formula and shake from fear because the formula:
GDP = C + G + I + NX
or
GDP = consumption + government+ investment + (exports − imports)
is clearly open to huge machinations (BTW G includes purchase of weapons for the military;
you get the idea what I am hinting at). Also all the contribution of financial firms to GDP should
probably be counted with negative sign ;-). Because large part of it is either racket or illicit
rent extraction from the society which weakens the "real" economy.
The problem with all major statistical aggregates is that "it is better not to see them being
made."
And if you measure GDP via
GDP = Compensation of employees + Gross operating surplus + Gross mixed income
are you sure that you will get the same metric?
The same is true for unemployment, inflation, oil production, and other "politically sensitive"
economic metrics.
When I see a person who quotes GDP figures or unemployment without discussing his view of its
reliability and margin of error (for example for GDP via inflation, or the method of including
"services" part of economy; same for the difference between fake U3 and more realistic U6 for
unemployment), I suspect that particular person is either charlatan, or neoclassical economist
( which is basically highly intersecting subsets ).
We probably should introduce the term "statiness" in analogy with "mathiness" (or would "number
racket" be a better term?)
As Kuznets told to "statistical charlatans" long ago:
The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria.
With quantitative measurements especially, the definiteness of the result suggests, often misleadingly,
a precision and simplicity in the outlines of the object measured. Measurements of national income
are subject to this type of illusion and resulting abuse, especially since they deal with matters
that are the center of conflict of opposing social groups where the effectiveness of an argument
is often contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity are
just as important when income measurements are interpreted from the point of view of economic
welfare. But in the latter case additional difficulties will be suggested to anyone who wants
to penetrate below the surface of total figures and market values. Economic welfare cannot be
adequately measured unless the personal distribution of income is known.
And no income measurement undertakes to estimate the reverse side of income, that is, the intensity
and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore,
scarcely be inferred from a measurement of national income as defined above.
"... In the same way, neoliberals are no different. They aren't bad people – they just see their policies as right and just because those policies are working well for them and the people in their class, and I don't think they really understand why it doesn't work for others – maybe, like Adam Smith, they think that is the "natural state" .. ..."
"... Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption is false or at least not true enough to form a sound foundation for useful economic theory. ..."
"... But "morality" means different things to different people. Smith only saw the morality of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate as much money as he could so that he would be seen by his peers as a good and worthy man who cares for his future generations and the well being of his class – he doesn't see this accumulation as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks that money could be better used provide for those without the basic needs to survive ..."
"... "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." ..."
"... Another I remember from Smith was something like, "The law exists to protect those who have much from those who have little." Sounds about right. ..."
"... One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's epicycles; assume the Earth is at the centre, and that the planets orbit in circles and simply by adding little circles-epicycles-you can accurately describe the observed motion of the planets. The right epicycles in the right places can describe any motion. But they can't explain anything, they add nothing to understanding, they subtract from it, because they are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere. ..."
"... Steve Keen seems to have latched onto this in the last year or so, pointing out that all production is driven by energy. And the energy comes ultimately from the sun. Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted from plant and animal remains). ..."
"... I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics). However, Kuznets , in the same report in which he presented modern concept of GDP to US congress, wrote following(from wikipedia): ..."
"... "The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. ..."
"... All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above. Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what." ..."
"... "So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?"@Vedant ..."
"... That is your explanation right there. Large abstract numbers such as GDP obscure social issues such as "the personal distribution of income." and the effort that goes into creating that income. Large abstract numbers obscure the moral dimension that must be a part of all economic discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There are lies, damned lies and statistics." Beware the credentialed classes! ..."
"... Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science (2001)", which tackles this subject in a general way: the facts that taking a mechanistic model as a paradigm for diverse areas of science is problematic and leads to myopia. ..."
"... He describes it as a form of 'scientific imperialism', stretching the use of concepts from one area of science to other areas and leading to bad results (because there are, you know, relevant differences). As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science') of economics, I was struck by the similar argument.) ..."
"... Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour, but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists. It is unscientific to apply universal laws discovered in physics and chemistry to economics without proving by observations that those laws also apply to economics. ..."
"... I get irritated by radical free-marketeers who when presented with a social problem tend to dogmatically assert that "The free market wills it," as if that ended all discussion. It is as if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to obey if we feel that the answer is unjust. ..."
"... Gibbon's Decline and Fall of the Roman Empire ..."
"... The moralistic explanations for the disintegration of the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity. More practical explanations, especially the loss of the North African bread basket to the Vandals, are presented in the scholarly work these days. ..."
"... That book of Gibbon's is an incredible achievement. If it is not read by historians today, it is their loss. Its moral explanations, out of fashion today, are actually quite compelling. They become more so when read with de Tocqueville's views of the moral foundations of American township democracy and their transmission into the behavior, and assumptions, of New Englanders, whose views formed the basis of the federal republican constitution. ..."
"... The loss of the breadbasket was problematical, too. And it may be that no civilization, however young and virile, could withstand the migrations forever, as they withstood or absorbed them, with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes may have been a symptom of the real, "moral," cause of the decline. ..."
"... From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through those years. ..."
"... It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought blew all of the top soil into the Med. It was an irreversible tragedy. ..."
"... Economics is not science, simply because economics does not take facts seriously enough to modify flawed theories. ..."
"... In college I couldn't help but notice the similarities between modern economic theory and the control theory taught in engineering. Not such a great fit though, society is not a mechanical governor. ..."
Yves here. This post takes what I see as an inconsistent, indeed, inaccurate stance
on Adam Smith, since it depicts him as advocating laissez faire and also not being concerned about
"emotions, sentiment, human relations and community." Smith was fiercely opposed to monopolies as
well as businessmen colluding to lower the wages paid to workers. He also saw The Theory of Moral
Sentiments as his most important work and wanted it inscribed on his gravestone.
Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 ..Here is a list
extracted from Wealth Of Nations:
the Navigation Acts, blessed by Smith under the assertion that 'defence, however, is of much
more importance than opulence' (WN464); Sterling marks on plate and stamps on linen and woollen
cloth (WN138–9); enforcement of contracts by a system of justice (WN720); wages to be paid
in money, not goods; regulations of paper money in banking (WN437); obligations to build party
walls to prevent the spread of fire (WN324); rights of farmers to send farm produce to the
best market (except 'only in the most urgent necessity') (WN539); 'Premiums and other encouragements
to advance the linen and woollen industries' (TMS185); 'Police', or preservation of the 'cleanliness
of roads, streets, and to prevent the bad effects of corruption and putrifying substances';
ensuring the 'cheapness or plenty [of provisions]' (LJ6; 331); patrols by town guards and fire
fighters to watch for hazardous accidents (LJ331–2); erecting and maintaining certain public
works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours)
(WN723); coinage and the mint (WN478; 1724); post office (WN724); regulation of institutions,
such as company structures (joint- stock companies, co-partneries, regulated companies and
so on) (WN731–58); temporary monopolies, including copyright and patents, of fixed duration
(WN754); education of youth ('village schools', curriculum design and so on) (WN758–89); education
of people of all ages (tythes or land tax) (WN788); encouragement of 'the frequency and gaiety
of publick diversions'(WN796); the prevention of 'leprosy or any other loathsome and offensive
disease' from spreading among the population (WN787–88); encouragement of martial exercises
(WN786); registration of mortgages for land, houses and boats over two tons (WN861, 863); government
restrictions on interest for borrowing (usury laws) to overcome investor 'stupidity' (WN356–7);
laws against banks issuing low-denomination promissory notes (WN324); natural liberty may be
breached if individuals 'endanger the security of the whole society' (WN324); limiting 'free
exportation of corn' only 'in cases of the most urgent necessity' ('dearth' turning into 'famine')
(WN539); and moderate export taxes on wool exports for government revenue (WN879).
"Viner concluded, unsurprisingly, that 'Adam Smith was not a doctrinaire advocate of laissez-faire'.
By Douglass Carmichael, perviously a Professor at University of California at Santa Cruz and
a Washington DC based consultant, which clients including Hewlett-Packard, World Bank, Bell laboratories,
The White House and the State Department. For the last ten years he has focused on the broad social
science issues relevant to rethinking humanity's relationship to nature. Cross posted from
the Institute for New Economic Thinking website
With Adam Smith, and hints before in Ricardo and others, economics took the path of treating the
economy as a natural object that should not be interfered with by the state. This fit the Newtonian
ethos of the age: science was great, science was mathematics; science was true, right and good.
But along the way the discussion in, for example, Montaigne and Machiavelli - about the powers
of imagination, myth, emotions, sentiment, human relations and community - was abandoned by the economists.
(Adam Smith had written his Theory of Moral Sentiments 20 years earlier and sort of left
it behind, though the Wealth of Nations is still concerned with human well-being.) Gibbon's
Decline and Fall of the Roman Empire was published in 1776, the same year as Smith's
Wealth , but hardly read today by most economists.
In philosophy and the arts (romanticism among others) there was great engagement in these issues
economics was trying to avoid. But that philosophy and art criticism have not been widely read for
many years.
The effect of ignoring the human side of lives was to undermine the social perspective of the
"political," by merging it with the individually focused "interest." So, instead of exploring the
inner structure of interest (or later utility or preference), or community feeling and the impact
of culture, these were assumed to be irrelevant to the mechanics of the market. Politics, having
to do with interest groups and power arrangements, is more vague and harder to model than economic
activity.
Those who wanted economics to be a science were motivated by the perception that "being scientific"
was appreciated by the society of the time, and was the path to rock-solid truth. But the move towards
economics as a science also happened to align with a view of the landed and the wealthy that the
economy was working for them, so don't touch it. We get the equation, embracing science = conservative.
This is still with us because of the implication that the market is made by god or nature rather
than being socially constructed. Since economics is the attempt at a description of the economy,
it was more or less locked in to the naturalist approach, which ignores things like class and ownership
and treated capital as part of economic flow rather than as a possession that was useable for social
and political power.
Even now, economics still continues as if it were part of the age of Descartes and avoids most
social, historical and philosophical thought about the nature of man and society. Names like Shaftesbury
and Puffendorf, very much read in their time, are far less known now than Hobbes, Descartes, Ricardo,
Mill and Keynes. Karl Polanyi is much less well known than Hayek. We do not learn of the social history
such as the complex interplay in Viennese society among those who were classmates and colleagues
such as Hayek, Gombrich, Popper and Drucker. The impact of Viennese culture is not known to many
economists.
The result is an economics that supports an economy that is out of control because the feedback
loops through society and its impact of the quality of life - and resentment - are not recognized
in a dehumanized economics, and so can't have a feedback correcting effect.
The solution, however, is not to look for simplicity, but to embrace a kind of complexity that
honors nature, humans, politics, and the way they are dealt with in philosophy, arts, investigative
reporting, anthropology and history. Because the way forward cannot be a simple projection of the
past. We are in more danger than that.
Anthony Pagden, in Why the Enlightenment is Still Important , writes that before the
enlightenment, late feudalism and the Renaissance, "The scholastics had made their version of the
natural law the basis for a universal moral and political code that demanded that all human beings
be regarded in the same way, no matter what their culture or their beliefs. It also demanded that
human beings respect each other because they share a common urge to 'come together,' and it required
them to offer to each other, even to total strangers, help in times of need, to recognize 'that amity
among men is part of the natural law.' Finally, while Hobbes and Grotius had accepted the existence
of only one natural right - the right to self-preservation - the scholastics had allowed for a wide
range of them." -
Pagen also writes, "The Enlightenment, and in particular that portion with which I am concerned,
was in part, as we shall now see, an attempt to recover something of this vision of a unified and
essentially benign humanity, of a potentially cosmopolitan world, without also being obliged to accept
the theologians' claim that this could only make sense as part of the larger plan of a well-meaning,
if deeply inscrutable, deity."
But as Pagen shows, that effort was overcome by market, technical and financial interests.
The reason this is so important is that the simple and ethical view in Smith (and many other classical
economists if we were to read them) that it was wrong to let the poor starve because of manipulated
grain prices, was replaced by a more mechanical view of society that denied human intelligence except
as calculators of self interest. This is a return to the Hobbesian world leading to a destructive
society: climate, inequality, corruption. Today, the poor are hemmed in by so many regulations and
procedures (real estate, education, police) that people are now starved. Not having no food, but
having bad food, which along with all the new forms of privation add up to a seriously starved life,
is not perceived by a blinded society to be suffering. Economics in its current form - most economics
papers and college courses - do not touch the third rail of class, or such pain.
Interesting. I've been reading (thanks to an intro from NC) Mark Blyth's "Austerity" and, thus
far, seems to imply, if not outright state, that Adam Smith was quite suspicious of government
intervention in the economy. The "can't live with it, can't live without it, don't want to pay
for it" perspective. The bullet points you've listed above seem to refute that notion.
Adam Smith tried to make a moral science out of what his class wanted to hear. If he had actually
gone into those factories of his time, he might have had a different opinion of what labour was
and how there was no "natural state" for wages, but only what was imposed on people who couldn't
fight back. If he had gotten out of his ivory tower for a while, he might have had a different
opinion of what those owners of stock were doing. He also might have had different views on trade
if he could have seen what was happening to the labourers in the textile industries in France.
And I could go on. But instead he created a fantasy that has been the basis for all economic thinking
since.
In the same way, neoliberals are no different. They aren't bad people – they just see their
policies as right and just because those policies are working well for them and the people in
their class, and I don't think they really understand why it doesn't work for others – maybe,
like Adam Smith, they think that is the "natural state" ..
Sorry, but there needs to be a Copernican Revolution in Economics just as there was in science.
We have to realize that maybe Adam Smith was wrong – and I know that will be hard – just as it
was hard for people to realize that the Earth wasn't the center of the universe.
Since I am retired, maybe I will go back to school, hold my nose and cover my lying eyes long
enough to finish that Economics degree, so that I can get good access to all the other windows
in Economics. I can't really believe I am the only person thinking this way – there must be some
bright people out there who have come to similar conclusions and I would dearly love to know who
they are.
Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which
is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics
is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption
is false or at least not true enough to form a sound foundation for useful economic theory.
But "morality" means different things to different people. Smith only saw the morality
of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate
as much money as he could so that he would be seen by his peers as a good and worthy man who cares
for his future generations and the well being of his class – he doesn't see this accumulation
as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks
that money could be better used provide for those without the basic needs to survive
I've read a fair amount of Wealth of Nations although far from all of it and my take was that
Smith was describing the economic system of his time as it was , not necessarily as it
should or must be. Smith gets a bad rap from the left due to many people over the last 200+ years
hearing what they wanted to hear from him to justify their own actions rather than what he actually
said.
I'm cherry picking a bit here since I don't have the time to go through several hundred pages,
but I think Smith might actually agree with you about the plight of labor and he was well aware
of what the ownership class was up to –
"People of the same trade seldom meet together, even for merriment and diversion, but
the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
there needs to be a Copernican Revolution in Economics
One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's
epicycles; assume the Earth is at the centre, and that the planets orbit in circles and
simply by adding little circles-epicycles-you can accurately describe the observed motion of the
planets. The right epicycles in the right places can describe any motion. But they can't
explain anything, they add nothing to understanding, they subtract from it, because they
are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere.
And that is exactly what Marx did, but then got himself sidetracked by trying to find (or create)
support for his labor theory of value.
Actually most of what he writes in Capital basically refutes said theory, instead hinting at
energy being the core source of value (how much food/fuel is needed to produce one unit, basically).
Steve Keen seems to have latched onto this in the last year or so, pointing out that all
production is driven by energy. And the energy comes ultimately from the sun. Either it is turned
into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted
from plant and animal remains).
Since words have somewhat flexible boundaries, it's hard to tell from what perspective this
response is looking at the history of science. Characterizing cybernetics as mechanistic would
require an unusually broad definition of "mechanistic". Even a superficial reading of Norbert
Wiener, Warren McCulloch, W. Ross Ashby, or any of the other early contributors to the discipline
will make one aware that they were explicitly trying to address the limitations of simplistic
mechanistic thinking.
In the related discipline, General Systems Theory, von Bertalanffy expressly argued that we
should take our cues from the organic living world to understand complex systems. With the introduction
of Second Order Cybernetics by Heinz von Foerster, Margaret Mead, Gregory Bateson and others,
the role of a sentient observer in describing the system in which he/she is embedded becomes the
focus of attention. Bateson was an original participant with many of the people mentioned above
in the Macy conferences where cybernetics was first introduced. The bulk of his work was a direct
attack on the mechanistic view of the natural world.
Of course, many writers treat cybernetics, General Systems Theory, and their related disciplines
as pseudoscientific. But those are typically people who are firmly committed to mechanistic explanations.
I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented
modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics).
However, Kuznets , in the same report in which he presented modern concept of GDP to US congress,
wrote following(from wikipedia):-
"The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative
measurements especially, the definiteness of the result suggests, often misleadingly, a precision
and simplicity in the outlines of the object measured. Measurements of national income are subject
to this type of illusion and resulting abuse, especially since they deal with matters that are
the center of conflict of opposing social groups where the effectiveness of an argument is often
contingent upon oversimplification.
All these qualifications upon estimates of national income as an index of productivity are just
as important when income measurements are interpreted from the point of view of economic welfare.
But in the latter case additional difficulties will be suggested to anyone who wants to penetrate
below the surface of total figures and market values. Economic welfare cannot be adequately measured
unless the personal distribution of income is known. And no income measurement undertakes to estimate
the reverse side of income, that is, the intensity and unpleasantness of effort going into the
earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement
of national income as defined above.
Distinctions must be kept in mind between quantity and quality of growth, between costs and returns,
and between the short and long run. Goals for more growth should specify more growth of what and
for what."
So , my question is why economists keep treating GDP as some scared metric when its creator
himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most
of the economists nowadays?
"So , my question is why economists keep treating GDP as some scared metric when its creator
himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most
of the economists nowadays?"@Vedant
" Economic welfare cannot be adequately measured unless the personal distribution of income
is known. And no income measurement undertakes to estimate the reverse side of income, that is,
the intensity and unpleasantness of effort going into the earning of income."
That is your explanation right there. Large abstract numbers such as GDP obscure social
issues such as "the personal distribution of income." and the effort that goes into creating that
income. Large abstract numbers obscure the moral dimension that must be a part of all economic
discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There
are lies, damned lies and statistics." Beware the credentialed classes!
Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science
(2001)", which tackles this subject in a general way: the facts that taking a mechanistic model
as a paradigm for diverse areas of science is problematic and leads to myopia.
He describes it
as a form of 'scientific imperialism', stretching the use of concepts from one area of science
to other areas and leading to bad results (because there are, you know, relevant differences).
As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science')
of economics, I was struck by the similar argument.)
Science does not imply only mechanistic models, which may be appropriate for physics, but not
economics. Science is a method of obtaining sound knowledge by iterative interaction between facts
and theory.
Just because equilibrium is shitty mechanistic model to try and stamp onto economics doesn't
mean that all scientific modeling of economics futile. Soddy just about derived MMT from the conservation
of energy in 1921.
Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour,
but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists.
It is unscientific to apply universal laws discovered in physics and chemistry to economics without
proving by observations that those laws also apply to economics.
Soddy needed to have developed a scientific methodology for economics first, before stating
his opinions which are scientifically unproven like most economic propositions.
I get irritated by radical free-marketeers who when presented with a social problem tend to
dogmatically assert that "The free market wills it," as if that ended all discussion. It is as
if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to
obey if we feel that the answer is unjust.
Gibbon's Decline and Fall of the Roman Empire was published in 1776, the same year
as Smith's Wealth, but hardly read today by most economists.
Other than as a reflection of the sentiments of the time Gibbon was writing in, historians
don't spend much time reading it either. The moralistic explanations for the disintegration of
the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity.
More practical explanations, especially the loss of the North African bread basket to the Vandals,
are presented in the scholarly work these days.
That book of Gibbon's is an incredible achievement. If it is not read by historians today,
it is their loss. Its moral explanations, out of fashion today, are actually quite compelling.
They become more so when read with de Tocqueville's views of the moral foundations of American
township democracy and their transmission into the behavior, and assumptions, of New Englanders,
whose views formed the basis of the federal republican constitution.
The loss of the breadbasket was problematical, too. And it may be that no civilization, however
young and virile, could withstand the migrations forever, as they withstood or absorbed them,
with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes
may have been a symptom of the real, "moral," cause of the decline.
After all, the Romans did not always have that breadbasket; indeed, they had to conquer it
to get it, along with the rest of the mighty and ancient civilizations of the Mediterranean and
beyond, using the strengths derived from the mores of their martial republic. The story of the
Punic Wars is a morality play in history, as much as anything else. But the main problem was the
dilution of the Roman republican mores into a provincial stew.
And after that nice detached remark, about which historians can surely natter on in the abstract,
I'll toss in this completely anti-historicist piece of nonsense: I think it's actually much the
same problem the Americans are having today, as the mores of the founders have dissolved into
the idea that the nation is about national government, centralized administration, world leadership,
global domination through military might, and imperialist capitalism. That is not a national ethic
that leads to lasting nobility of purpose and moral strength-as George Washington and Ike Eisenhower
both pointed out.
Dendrochronology ( tree ring dating & organic history ) has established a wholly new rationale
for the termination of the Roman Empire the re-boot of the Chinese and Japanese cultures and
the death of a slew of Meso-American cultures.
From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through
those years.
The Orientals actually heard the blasts recognized that they emminated from the Indonesian
islands. ( Well, at least to the south. ) The erruption and the weather was duly recorded by Court
scribes.
Roman accounts assert that 90% of the population of Constantinople died or fled. ( mostly died
) The Emperor and his wife were at the dockside ready to flee - when she talked him back off the
boat. Her reasoning was sound: it's Hell everywhere. He won't have any authority once he leaves
his imperial guard.
It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought
blew all of the top soil into the Med. It was an irreversible tragedy.
This super drought triggered the events in Beowulf - and the exodus of the Petrans from Petra.
They marched off to Mecca and Medina both locations long known to have mountain springs with
deep water. The entire Arabian population congregated there.
This was the founding population amongst which Mohammed was raised many years later.
The true reason that Islam swept through Araby and North Africa was that both lands were still
largely de-populated. The die-off was so staggering that one can't wrap ones mind around it.
Period art is so bleak that modern historians discounted it until the tree ring record established
that this trauma happened on a global scale.
Or throw them out! I remember the very first thing I was taught in Economics 101 about supply
and demand and how they would balance at an equilibrium price. It didn't take much thinking to
realize that there is no equilibrium price and that an equilibrium price was exactly the last
thing suppliers or demanders wanted, and that the price of a good depended on who had the most
power to set the price. Yet, we had to accept the "supply and demand theory" as coming directly
from God. It's as if we were taught in Chemistry that the only acceptable theory of bonding possible
was the hydrogen-oxygen bond and even though we could see with our own eyes that hydrogen also
bonds to carbon, we should throw that out because it is an aberration from "acceptable theory" ..
Yes, coming from God; Platonic, like a Form. Economics is written in Forms, like "homo economicus"
and "the efficient market." But we live in the Cave, where the markets that humans actually make
are sad imitations of the Forms in the textbooks.
There's a lot good in the post, I think; noting the important philosophical underpinnings and
challenges to Economics, and particularly in making it a moral, and therefore political and "social"
science. But it's great to see where people's use of "incantatory names from the past" is called
out by the curator. It's a pet peeve.
Economics is the last "science" to hold onto the notion of equilibrium. The rest has moved on to complex systems/chaos theory, first demonstrated in meteorology.
Trying to apply complex systems to economics have been the goal of Steve Keen's work for several
decades now.
In college I couldn't help but notice the similarities between modern economic theory and the
control theory taught in engineering. Not such a great fit though, society is not a mechanical
governor.
Ha. That's the same thing that got economists so excited. Things is, an engineering student
attempting to model a simple system with two moving parts cares a great deal about whether the
moving parts are connected by a spring, or ball screw, or shock absorber, or lever, or even invisible
stuff like a temperature gradient when coming up with the system math model. Economists seem to
think wtf is the difference?
Next, if the math gets a bit unwieldy as the number of moving parts increase, which it does
in a hurry, they decide to simplify the math. Next, assume they have perfect sensors for everything and system lag can assumed to be zero
for talking purposes, and in research papers too. Next, hysteresis effects due to bent parts, leaky valves and stretched springs are assumed
not to exist. Congress has the "Highway Bill" thingy to address that.
Next, the guy with the control knob will do the "right thing". Or better yet, a "market" is
doing the control knob. There could be "intermediaries", but these are modeled as zero loss pieces
of golden wire and gold plated connectors.
Finally, money comes from batteries and there is no such thing in the real world like "shorts",
"open circuits", or "semiconductors" with their quantum tunneling properties.
Thanks for this, and especially the heads up about the author's take on Smith. This is exactly
what I'm on about. Not only are there more ways of knowing than the infamous mechanical, it itself
should've died long ago.
The author stresses economics is stuck in the age of Descartes. The history of Newton's refutation
of Descartes's mechanical philosophy is very interesting. Yes, refutation. Descartes's mechanical
philosophy is as dead as a dodo. So why does it still plague us? Obviously, because thinking of
and acting on nature as if it were all just one great big machine works at getting you paid, much
better than that wishy-washy humanism crap. /f (facetious).
I used to go on and on against reducing everything to mechanisms, and I largely blamed Newton.
I was wrong.
I've spent an hour trying to boil this down. Ain't happenin. Apologies for the length.
The background is the so-called "mechanical philosophy" – mechanical science in modern terminology.
This doctrine, originating with Galileo and his contemporaries, held that the world is a machine,
operating by mechanical principles, much like the remarkable devices that were being constructed
by skilled artisans of the day and that stimulated the scientific imagination much as computers
do today; devices with gears, levers, and other mechanical components, interacting through
direct contact with no mysterious forces relating them. The doctrine held that the entire world
is similar: it could in principle be constructed by a skilled artisan, and was in fact created
by a super-skilled artisan. The doctrine was intended to replace the resort to "occult properties"
on the part of the neoscholastics: their appeal to mysterious sympathies and antipathies, to
forms flitting through the air as the means of perception, the idea that rocks fall and steam
rises because they are moving to their natural place, and similar notions that were mocked
by the new science.
The mechanical philosophy provided the very criterion for intelligibility in the sciences.
Galileo insisted that theories are intelligible, in his words, only if we can "duplicate [their
posits] by means of appropriate artificial devices." The same conception, which became the
reigning orthodoxy, was maintained and developed by the other leading figures of the scientific
revolution: Descartes, Leibniz, Huygens, Newton, and others.
Today Descartes is remembered mainly for his philosophical reflections, but he was primarily
a working scientist and presumably thought of himself that way, as his contemporaries did.
His great achievement, he believed, was to have firmly established the mechanical philosophy,
to have shown that the world is indeed a machine, that the phenomena of nature could be accounted
for in mechanical terms in the sense of the science of the day. But he discovered phenomena
that appeared to escape the reach of mechanical science. Primary among them, for Descartes,
was the creative aspect of language use, a capacity unique to humans that cannot be duplicated
by machines and does not exist among animals, which in fact were a variety of machines, in
his conception.
As a serious and honest scientist, Descartes therefore invoked a new principle to accommodate
these non-mechanical phenomena, a kind of creative principle. In the substance philosophy of
the day, this was a new substance, res cogitans, which stood alongside of res extensa. This
dichotomy constitutes the mind-body theory in its scientific version. Then followed further
tasks: to explain how the two substances interact and to devise experimental tests to determine
whether some other creature has a mind like ours. These tasks were undertaken by Descartes
and his followers, notably Géraud de Cordemoy; and in the domain of language, by the logician-grammarians
of Port Royal and the tradition of rational and philosophical grammar that succeeded them,
not strictly Cartesian but influenced by Cartesian ideas.
All of this is normal science, and like much normal science, it was soon shown to be incorrect.
Newton demonstrated that one of the two substances does not exist: res extensa. The properties
of matter, Newton showed, escape the bounds of the mechanical philosophy. To account for them
it is necessary to resort to interaction without contact. Not surprisingly, Newton was condemned
by the great physicists of the day for invoking the despised occult properties of the neo-scholastics.
Newton largely agreed. He regarded action at a distance, in his words, as "so great an Absurdity,
that I believe no Man who has in philosophical matters a competent Faculty of thinking, can
ever fall into it." Newton however argued that these ideas, though absurd, were not "occult"
in the traditional despised sense. Nevertheless, by invoking this absurdity, we concede that
we do not understand the phenomena of the material world. To quote one standard scholarly source,
"By `understand' Newton still meant what his critics meant: `understand in mechanical terms
of contact action'."
It is commonly believed that Newton showed that the world is a machine, following mechanical
principles, and that we can therefore dismiss "the ghost in the machine," the mind, with appropriate
ridicule. The facts are the opposite: Newton exorcised the machine, leaving the ghost intact.
The mind-body problem in its scientific form did indeed vanish as unformulable, because one
of its terms, body, does not exist in any intelligible form. Newton knew this very well, and
so did his great contemporaries.
And later:
Similar conclusions are commonplace in the history of science. In the mid-twentieth century,
Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern of nature
is utterly impossible (and a purely materialistic or mechanistic physics, such as that of Lucretius
or of Descartes, is utterly impossible, too)"; his mathematical physics required the "admission
into the body of science of incomprehensible and inexplicable `facts' imposed up on us by empiricism,"
by what is observed and our conclusions from these observations.
So the wrong guy was declared the winner of Descartes vs. Newton, and we've been living with
the resultant Frankenstein's monster of an economy running rampant all this time. And the mad
"scientists" who keep it alive, who think themselves so "realistic" and "pragmatic" in fact are
atavists ignorant of the last few centuries of science. But they do get paid, whereas I (relatively)
don't.
Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern
of nature is utterly impossible (and a purely materialistic or mechanistic physics, such as
that of Lucretius or of Descartes, is utterly impossible, too)"
I think that Newton considered phenomena like gravity, magnetism, and optics to be non-material,
perhaps even spiritual, and separate from matter. Modern physicists would disagree, and would
consider gravity and electro-magnetism to be purely material phenomena. Newton didn't prove that
the world is non-mechanical; he showed that objects do not need to touch for them to have influence
on each other.
It is still quite possible that there are non-material phenomena, but those would be separate
from gravity and electro-magnetism, which Newton considered non-material.
Are all products of the brain. I don't see how the results of the interaction of electrical
impulses and chemicals are non-material. Magic is not an explanation for anything.
So Newton formulated his theories because of his belief in Alchemy and not, as I had thought,
despite it.
Discussions like this are what make this site so great.
All modern economic thought ( 1900+ ) has been corrupted by the arrogance of Taylor's Time
& Motion Studies. The essence of which is that bean counters can revolutionize economic output by statistics
and basic accounting.
AKA Taylorism.
Big Government is Taylorism as practiced.
At bottom, it arrogantly assumes that if you can count it, you can optimise it.
The fact is that 'things' are too complicated.
Taylor's principles only work in a micro environment. His work started in machine shops, and
at that level of simplicity, still applies.
Its abstractions and assumptions break down elsewhere.
MOST economic models in use today are the grandsons of Taylorism.
They are also the analytic engines that have driven the global economy to the edge of the cliff.
For my penny's worth the sentence "Today, the poor are hemmed in by so many regulations and
procedures (real estate, education, police) that people are now starved" reveals the main problem.
Too many of the most lucrative parts of every national economy have been closed off by politicians
and reserved for their friends.
DAVID BARSAMIAN: One of the heroes of the current right-wing revival is Adam Smith. You've
done some pretty impressive research on Smith that has excavated a lot of information that's
not coming out. You've often quoted him describing the "vile maxim of the masters of mankind:
all for ourselves and nothing for other people."
NOAM CHOMSKY: I didn't do any research at all on Smith. I just read him. There's no research.
Just read it. He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism
he despised.
People read snippets of Adam Smith, the few phrases they teach in school. Everybody
reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division
of labor is. But not many people get to the point hundreds of pages later, where he says that
division of labor will destroy human beings and turn people into creatures as stupid and ignorant
as it is possible for a human being to be.
And therefore in any civilized society the government
is going to have to take some measures to prevent division of labor from proceeding to its
limits.
And here is a link to Adam Smith's poignant denunciation of division of labour:
This mention of division of labor is, as Chomsky points out, left out of the index of the University
of Chicago scholarly edition! Of George Stigler's introduction Chomsky claims, "It's likely he
never opened The Wealth of Nations. Just about everything he said about the book was completely
false."
I recommend reading the entire paragraph at the link above. Smith writes:
"The man whose whole life is spent in performing a few simple operations, of which the effects
are perhaps always the same, or very nearly the same, has no occasion to exert his understanding
or to exercise his invention in finding out expedients for removing difficulties which never
occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as
stupid and ignorant as it is possible for a human creature to become. But in every improved
and civilized society this is the state into which the labouring poor, that is, the great body
of the people, must necessarily fall, unless government takes some pains to prevent it.
"
"... Sociologists spend their careers trying to understand how societies work. And some of the most pressing problems in big chunks of the United States may show up in economic data as low employment levels and stagnant wages but are also evident in elevated rates of depression, drug addiction and premature death. In other words, economics is only a piece of a broader, societal problem. So maybe the people who study just that could be worth listening to. ..."
"... "Once economists have the ears of people in Washington, they convince them that the only questions worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a Harvard sociologist and president of the American Sociological Association. "That's not to take anything away from what they do. It's just that many of the answers they give are very partial." ..."
"... For starters, while economists tend to view a job as a straightforward exchange of labor for money, a wide body of sociological research shows how tied up work is with a sense of purpose and identity. ..."
"... "Wages are very important because of course they help people live and provide for their families," said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and a feeling of usefulness and all the things that make human beings happy and able to function. ..."
"... That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found that in the United States, his subjects viewed their ability to land a job as a personal reflection of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard, blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged by rejection. ..."
"... By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the Wall Street banking cartel. ..."
"... BTW what happened to Krugman's perfunctory twice a year column on inequality? ..."
"... The nicotine addict cares about as much about 'risk under uncertainty' as Harford. ..."
What if Sociologists Had as Much Influence as
Economists? https://nyti.ms/2m9yDHL via
@UpshotNYT
NYT - NEIL IRWIN - MARCH 17, 2017
Walk half a city block in downtown Washington, and there is a good chance that you will pass an
economist; people with advanced training in the field shape policy on subjects as varied as how
health care is provided, broadcast licenses auctioned, or air pollution regulated.
Turn on cable news, and the guests who opine on the weighty public policy questions of the
day quite often have some title like "chief economist" underneath their name. And there are economists
sprinkled throughout the government - there is an entire council of them advising the president
in most administrations, if not yet in this one.
But as much as we love economics here - this column is named Economic View, after all - there
just may be a downside to this one academic discipline having such primacy in shaping public policy.
They say when all you have is a hammer, every problem looks like a nail. And the risk is that
when every policy adviser is an economist, every problem looks like inadequate per-capita gross
domestic product.
Another academic discipline may not have the ear of presidents but may actually do a better
job of explaining what has gone wrong in large swaths of the United States and other advanced
nations in recent years.
Sociologists spend their careers trying to understand how societies work. And some of the most
pressing problems in big chunks of the United States may show up in economic data as low employment
levels and stagnant wages but are also evident in elevated rates of depression, drug addiction
and premature death. In other words, economics is only a piece of a broader, societal problem.
So maybe the people who study just that could be worth listening to.
"Once economists have the ears of people in Washington, they convince them that the only questions
worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a
Harvard sociologist and president of the American Sociological Association. "That's not to take
anything away from what they do. It's just that many of the answers they give are very partial."
As a small corrective, I took a dive into some sociological research with particular relevance
to the biggest problems facing communities in advanced countries today to understand what kinds
of lessons the field can offer. In 1967, Senator Walter Mondale actually proposed a White House
Council of Social Advisers that he envisioned as a counterpart to the well-entrenched Council
of Economic Advisers. It was never created, but if it had been, this is the sort of advice it
might have been giving recent presidents.
For starters, while economists tend to view a job as a straightforward exchange of labor for
money, a wide body of sociological research shows how tied up work is with a sense of purpose
and identity.
"Wages are very important because of course they help people live and provide for their families,"
said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can
do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and
a feeling of usefulness and all the things that make human beings happy and able to function.
That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist
at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found
that in the United States, his subjects viewed their ability to land a job as a personal reflection
of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard,
blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar
unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged
by rejection.
It seems plausible that this helps explain why so many Americans who lost jobs in the 2008
recession have never returned to the labor force despite an improved job market. Mr. Sharone is
working with career counselors to explore how to put this finding to work to help the long-term
unemployed. ...
By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from
policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the
Wall Street banking cartel.
BTW what happened to Krugman's perfunctory twice a year column on inequality?
I normally try to avoid index number theory. Don't trust me on
this.
It is well understood that real GDP is a very imperfect
measure of welfare. We teach that in first year macro. That is
not what this post is about. What I'm worried about is whether
real GDP is an imperfect measure of itself. Does it have
internal validity?
If better technology enabled producers of new goods
to ramp up production more quickly to meet initial demand, would
that cause the measured growth rate to fall?
Initially an economy produces 100 kg of apples at $1 per kg.
Then bananas get invented. After a long slow adjustment, the
economy eventually reaches a new long run equilibrium and
produces 50 kg of apples at $1 per kg and 50 kg of bananas at $1
per kg.
We know that nominal GDP stays the same at $100. But
what happens to real GDP? The answer depends on what happened
during the long slow process of adjustment. Was it supply, or
demand, or both, that caused the slow adjustment?
To keep it simple, assume the price of apples is always $1
per kg (the central bank targets the price of apples). And
assume the quantity of bananas produced and consumed increases
slowly and continuously from 0 to 50 kg. And assume the
statistical agency that measures GDP has access to continuous
time data (so we can ignore the difference between
Paasche, Laspeyres, and Fisher price indices
). Remember that
Real GDP = Nominal GDP/Price Level. What happens to the price of
bananas during the long slow adjustment period?
Assume that supply and demand adjust equally slowly to
the invention of bananas. It takes producers time to switch
from producing apples to producing bananas, and it takes
consumers time to switch from consuming apples to consuming
bananas. So the price of bananas is constant at $1 per kg
during the adjustment. The weights in the price index slowly
change (with a falling number of apples and increasing number
of bananas in the basket), but the price index stays
constant, because neither price is changing. Real GDP is the
same as it was before bananas were invented.
Assume that supply adjusts more slowly than demand.
Producers need a high price to give them the incentive to
adjust. So the price of bananas starts out above $1, and
slowly falls over time to $1. So the price index falls over
time. Real GDP ends up higher than it was before bananas were
invented.
Assume that demand adjusts more slowly than supply.
Consumers need a low price to give them the incentive to
adjust. So the price of bananas starts out below $1, and
slowly rises over time to $1. So the price index rises over
time. Real GDP ends up lower than it was before bananas were
invented.
Even if you say that my third case is implausible, and that
demand always adjusts more quickly than supply, so the price of
new goods (relative to existing goods) always starts out high
and falls over time, that does not resolve the problem. The
initial price of bananas, when they first appear on the market,
depends on how many bananas can be grown in that very first
season. Anything that enables producers of new goods to increase
production for the initial roll-out will permanently reduce the
measured level of real GDP.
The underlying problem is that we do not observe the price of
bananas before bananas are invented.
Unless you allow a
discontinuous jump in real GDP the moment the new good hits the
market, even if initial production is negligible, I don't think
you can avoid this paradox.
Thanks to commenters (especially
louis
) on my previous post, and to Brent Moulton via Twitter
and David Rosnick via email. Errors and opinions are mine alone.
As
this starts as an apple economy, the large effect is to lower
apple investment, but apple investment can't fall beneath
depreciation (or more accurately, can't fall below depreciation
at all) without affecting the price of apples, so there is a
limit to how fast banana production can ramp up without causing
this. Then there is the matter of relative investment costs,
higher investment costs would lower growth while lower
investment costs would increase growth and only if these were
nearly equal would pricing be significant and even then only as
one good among many. I expect pricing would have this effect
which would differ depending on whether apples and bananas were
treated as substitutes. It would take some time for bananas to
even make it into baskets reducing their impact on measurements,
missing both any discontinuity or initial change.
Posted by: Lord |
February 07, 2017 at 11:52 AM
Lord: there's lots of things that could be determining what's
happening during the adjustment period. But for the question
addressed in this post, the only thing that matters is whether
the *relative* price of bananas starts out above one apple or
below one apple. Dollar prices won't matter. I made the
assumption that the *nominal* price of apples stays at $1
throughout, just to make the discussion simpler.
When a new good is
introduced how is it factored int the price index ? For example
suppose in period 1 100 apples are produced, and in period 2 50
Apples and 25 Banana. As the price of apples is fixed at $1 and
GDP is fixed at $100 we know the price of bananas is $2. But how
do we use this information to calculate the change in the price
level between period 1 and period 2?
(I can see that once we have sales data and prices for all
periods after bananas have appeared the logic that Nick
describes kicks in - but I can't see how we deal with the
introduction of bananas)
Posted by: Market
Fiscalist |
February 07, 2017 at 02:26 PM
I
think you're right. There's a technical literature on path
dependence of Divisia indices (see, for example,
a paper from Nick Oulton
). The chain indices used for GDP
and the CPI are approximations to the continuous-time Divisia
indices, so it's clearly relevant. The problem arises whenever
new goods are introduced or old ones disappear, and would also
be relevant when large shocks (e.g., major wars) take place that
result in temporary major changes to consumption patterns. It's
a hard problem, and though the literature suggested some
potential solutions, they haven't reached the stage of
statistical agency implementation.
Regarding your third case, sometimes sellers offer low
initial prices for goods or services for which consumption is
likely to be persistent -- new social networks, narcotics. So I
don't think it's implausible.
Posted by:
Brent Moulton
|
February 07, 2017 at 02:30 PM
Your price index doesn't have to rise or fall monotonically with
time. If we weight the price of each good by its share of
nominal spending, then the starting and ending price indexes are
the same – the price level is 1.
What happens in the meantime
depends on supply and demand effects.
Imagine we're partway through the transition, and our economy
sells 50kg of apples at $1 and 25kg of bananas at $2 (the
remaining banana trees are waiting to mature). Nominal GDP is
$100 as before, but the expense-weighted price index is 50%*($1
+ $2) = $1.50, so real GDP is $66. This is lower than the
long-run equilibrium of $100, but so is the actual fruit
consumption. It would be accurate to call this economy
comparatively depressed.
If banana trees mature quickly but can only be planted
slowly, then maybe we're selling 90kg of apples at $1 and 10kg
of bananas at $2. Nominal GDP is now $110, and the
expense-weighted price index is about 1.18 (9/11*1 + 2/11*2), so
the economy still looks depressed (real GDP of 93) but not as
badly.
In the other case (apple trees are exogenously converted to
banana trees but bananas are an acquired taste), then we might
sell 90kg of apples at $1 and 10kg of bananas at $0.50. Nominal
GDP is $95, and the price index is about 0.973 (9/9.5 +
0.25/9.5), so real GDP is about 97.6. If the new bana
In both cases, a statistician would observe a fall in real
GDP due to a preference shift, followed by a rebound to its
prior level. The unstated assumption for meaningful RGDP is that
the utility of a price-index basket is approximately the same
throughout the interval, and that's what's obviously untrue with
preference changes.
Posted by: Majromax |
February 07, 2017 at 02:49 PM
Nick: You price the value of bananas at a constant $1 over the
long period that it takes to ramp production from zero to 50 Kg.
It seems to me that you need to simultaneously recognize that
to establish 'price', you need to have two persons trading and
agreeing on a commonly accepted value ('price').
Hence, one option is that the banana producer is otherwise
unemployed but now producing his first banana. The GDP should
increase. OTOH, the buyer may be substituting goods so his
contribution to increased GDP is negative, making the final GDP
change zero. Further OTOH, the buyer may be borrowing to fund
the purchase which would result in a valid GDP increase.
I think I am pointing out that just considering the
producer's contribution to GDP is an incomplete exercise. A new
product has several tentacles that impact GDP.
Posted by:
Roger Sparks
|
February 07, 2017 at 02:59 PM
MF: Brent Moulton (who commented just after you) knows much more
than I do about how your question is normally answered by those
who actually measure GDP. But I think the short answer is: "with
difficulty". I think the point of this post is to say that that
the problem posed by new goods does not get very small even if
the expenditure share of new goods starts out very small when
they are first introduced. The problem gets bigger over time.
Thanks Brent! Glad to hear I'm not totally out-to-lunch on this!
Purely speculative, but I'm wondering if this might be part of
the productivity growth slowdown puzzle? If new goods don't fall
in price nowadays as much as they used to, simply because it's
easier to build a big batch of new phones before releasing them
(and/or they keep initial prices low because of network effects,
as you say).
Posted by:
Nick Rowe
|
February 07, 2017 at 03:11 PM
Majro: "Your price index doesn't have to rise or fall
monotonically with time. If we weight the price of each good by
its share of nominal spending, then the starting and ending
price indexes are the same – the price level is 1."
The share
of nominal spending before bananas are invented? Or after we get
to the new long run equilibrium? If "before", then the price of
bananas doesn't matter at all.
Roger: "Nick: You price the value of bananas at a constant $1
over the long period that it takes to ramp production from zero
to 50 Kg."
Why? And suppose we have a different example, where the
(relative) price of bananas never reaches some constant level,
because of ongoing technological improvement in growing bananas.
Posted by:
Nick Rowe
|
February 07, 2017 at 05:03 PM
Market Fiscalist: The way the CPI is calculated by statistical
agencies, they would simply ignore the bananas in calculating
the period 1 to period 2 price change. The "market basket" that
is selected in period 1 doesn't have any bananas in it, so the
price change from period 1 to period 2 is based solely on apples
(no price change).
Nick: The standard (Konus) constant-utility
cost-of-living index theory assumes that each period's
consumption is on a stable demand curve. If, for your second
case, you assume that it takes time for producers to switch but
that each period consumers are consuming along their demand
curve, I think the continuous time price index should come close
to the true Konus cost-of-living index--especially if there
isn't any discrete jump in consumption when the item is first
introduced. Real GDP increases, and that's what we expect given
that consumers prefer consuming A+B to A. Your first and third
cases involve adjustment costs for consumers and thus don't fit
easily in the standard cost-of-living index model.
Posted by:
Brent Moulton
|
February 07, 2017 at 09:48 PM
Brent: I was wondering if something like that would work. We
could maybe imagine extending my second case to have a
succession of new goods invented.
Posted by:
Nick Rowe
|
February 08, 2017 at 04:09 AM
Do
they teach students in first year macro that when they later
become professors they should say "we teach that in first year
macro"? I see that expression a lot these days. It sounds like,
this is truth. ;)
I remember Kotlikoff once using it when I
suggested to him that it might not be clarifying to say that the
"true" debt is 119 gazillion dollars. "I have been teaching my
students that for 20 years." Oh, well could you then please stop
writing that AND stop confusing your young charges?
More seriously, I am curious how important you think this
index number issue might be compared with the more basic issue
of measuring and aggregating individual utility. What is GDP
supposed to correlate with? Back in the day it was about the
flow of nominal demand but then seemed to morph into aggregate
real goodness.
I love your work. Thanks.
Posted by:
Gerard MacDonell
|
February 08, 2017 at 08:21 AM
At
risk of straying too far off topic, let's think of this in a
trade context.
Instead of bananas being new to the world, let's say they are
just new to a market. Country A can produce only apples, Country
B produces both apples and bananas. In country B, one apple is
tradeable for one banana.
When country B opens up to trade with country A, suddenly there
is a global jump in demand for bananas. The price of bananas in
terms of apples rises in country B to induce the people to
consume fewer bananas and more apples. A certain number of
apples flows to country B in exchange for a smaller flow of
bananas back to A.
A's GDP, in terms of apples, shouldn't change -- its apple crop
is the same as it was the previous year, although consumers are
better off due to trade.
You'd think B's GDP should rise, as the value of the bananas it
produces is worth more in terms of apples than it used to be. Or
would we just say that's a change in the price level and real
GDP is unchanged? Seems like this depends on how you construct
the price index.
Gains from trade are real, but it seems they would be tricky to
capture in GDP framework
The main cases where I use that "we teach that
in first year" line is (for example, like in this case) some
anti-economist says "GDP is a bad measure of welfare!" thinking
they are making some devastating new critique of economics.
How important is this particular issue, empirically? I don't
know. And I first wanted to make sure my head was straight on
the theory. But speculating wildly, I am wondering if the
productivity growth slowdown might be caused by something like
this? I have no evidence to back that up, but that is what is at
the back of my mind about *possible* empirical relevance. It's
less about utility per se (which was at the back of my mind in
the last post) than productivity.
louis: only a little off-topic. I'm going to be a bit shaky
on the answer. I *think* country B's real GDP stays the same,
since it is measured in terms of the basket it produces. But its
real income *measured in terms of the basket it consumes* will
rise or stay the same, depending on whether we use a Paasch or
Laspeyres index (old basket or new basket). More simply, if your
Terms of Trade improve, real GDP can stay the same, but increase
when NGDP is deflated by the CPI.
Posted by: marcel proust
|
February 08, 2017 at 11:39 AM
"this issue" == valuing newly introduced products.
Briefly (IIRC, and I may well not), the solution he presents for
getting the price index right is to estimate a demand curve for
bananas (presumably right after their introduction) and set the
pre-introduction price to the point where demand is zero. This
allows for comparison of the CPI's before and after bananas hit
the market.
Posted by: marcel proust
|
February 08, 2017 at 11:51 AM
marcel: yes. But that was a different question (trying to
measure utility gains). And that assumes an extreme version of
my case 2, where demand adjusts instantly and supply adjusts
slowly.
Posted by:
Nick Rowe
|
February 08, 2017 at 12:09 PM
Let's get the same result but use the basket brigade model.
Instead of a continuous result,m this result is the same but
never leaves probability space.
Chiqita introduces bananas,
and initially we love them. So the delivery trucks and consumer
baskets are fuller than normal. Each time we move goods our cash
cards swipe at market price, so the Savings and Loan machine is
building the significant probability distribution of cash swipes
in (deposit) or out (loan). The S&L machine enforces
amortization on the full baskets and everyone pays a suprising
'rate' on their purchases.
As a result of the bananas, the yield curve is steeper. The
S&L machine is forcing us to go to work and build bigger
baskets, or develop a more granular distribution that we can
make more frequent trips and keep our basket from ov er filling.
If we choose the latter, we get more term points on the yield
curve. Or, we can go home and work out a substitution between
bananas and mangos, making our baskets fill normally again.
The key here is our sense of equilibrium, we know when our
baskets ate optimally full. We know that because we hate waiting
in line, so our sense of frustration stabilizes the queues. When
queues ate sable, mean equals variance in our basket. At that
condition, then every single person in the monetary zone can
independently calculate the probability of the basket
overflowing or underflowing. Supply then equals demand and
container algebra works, we can pretend to be continuous.
It is Nicks model, fouled up a bit, but just recast as a
sequence of probabilistic purchases.
The currently established welfare criterion used in international trade theory results in
conclusions that are not only intellectually dishonest and deceptively misleading but are not as
value free as is commonly believed. Although academic economists have devoted much effort to
understanding the distributional effects of trade, the current welfare conclusions of trade
basically ignore entirely the distributional effects. This paper argues that trade policy needs
to be framed within a legitimate moral framework that moves distribution to the forefront. The
welfare effects of trade should be judged by what actually happens, not by what could potentially
happen in an idealized world with costless transfers.
In the first section the inadequacy of current international welfare economics is discussed.
Second, the justification for using a utilitarian framework is developed along with a brief
history of the doctrine and its role in Cambridge welfare economics. Next the properties of a
utility function that would be realistic as well as having desirable mathematical properties are
discussed. Welfare considerations would not be especially important if trade did not create
significant redistributions; therefore the size of the redistributions relative to the efficiency
gains from trade liberalization is examined. Finally, the welfare effects of trade liberalization
using various trade models and simulations are discussed.
The current approach to the welfare analysis of trade is to follow the recommendation of Hicks
and Kaldor and equate national welfare with real national income and ignore entirely how income
is distributed. Although admitting that considering distribution involves an unscientific
value judgment, numerous economists (such as I.M.D. Little, Frank Knight, Edward Chamberlin) have
concluded that distribution is too important to ignore and it is better to consider it even if
that makes the analysis less than scientific. As Blaug has stated (1978,p. 626), "the true
function of welfare economics is to invade the discipline of applied ethics rather than to avoid
it."
The basic objective of trade policy under modern welfare analysis therefore is to maximize
national income. This outcome is considered optimal because of the Hicks-Kaldor compensation
principle whereby everyone could potentially be made better off than in any other alternative
with the appropriate lump sum transfers. For some, the possibility that these transfers
could be made is sufficient, regardless of whether any transfers are actually made. For others,
there is a naive belief that after all the income maximizing policies are implemented, that the
government (or society) then consistently redistributes income in a manner consistent with its
specific social welfare function. However, Rodrik (1997, p.30) is correct when he states that in
regard to trade policy changes, "compensation rarely takes place in practice and never in full."
Even if society wanted to redistribute income, however, it can not be done in a zero costs lump sum fashion.
20% of US GDP was created from thin air via QE of well over
4 Trillion dollars. That doesn't even count whimsical creation over the
same time period elsewhere. The ECB just yesterday extended their QE
program so that it will add up to about 2 Trillion Euros - which will
have taken place over about 18 – 24 months.
There is no economy. That has all gone away, and there is no way in
hell these bond and bond packages on central bank balance sheets are
going to be retired (thereby extracting that money from the system
overall) and so It's Not Coming Back. Probably Ever.
This is critical to oil because we do micro-economic evaluations of
what wells are profitable and which are not, and our analysis and
conclusions make less and less sense as we've seen from the non
profitable activity going on. That's symptomatic of the disease.
Nothing was "fixed" from 2008 onward, and that's not a swipe at Obama.
It's not a swipe at anything. It's just reality. When you create 20% of
your GDP by whimsy, the measure can't possibly mean anything. And that's
global.
We all have to live in the world using money in our own microscopic
bubbles of economy, but from the macro perspective, that's pretense, and
it's pretense everything depends on. Just keep in mind Fed Governors
themselves have been quoted saying "we're in completely uncharted
territory. No one knows what is going to happen, and that includes us,
despite the superb people we have on staff trying to figure it out."
Trump is the wildcard inserted into a world of wildcards. I can assure
you if the administration strongly doesn't want Ford building cars in
Mexico, they probably won't.
"... In our artificial economy real things do not matter so much, but politics and managing the
perceptions of the public are of paramount importance. And so the 'Goldilocks' Jobs Report, which is
how the business TV channels described that lukewarm piece of dreck, did little to rally the markets
except fleetingly intraday. ..."
"... The headline includes ALL employees, but if you take out the top 15-20% of managers, the average
hourly earning growth showed a pronounced downward divergence to a lower growth rate. The BLS switched
to this number including all employees a few years ago from the non-supervisory number. As a rule of
thumb, when someone shows you the 'average' number, find out the median number for the same sample.
Especially in these days of historically high inequality. ..."
"The wealth of another region excites their greed; and if it is weak, their lust for power
as well. Nothing from the rising to the setting of the sun is enough for them.
Among all others only they are compelled to attack the poor as well as the rich. Robbery, rape,
and slaughter they falsely call empire; and where they make a desert, they call it peace."
Tacitus
"He who makes a beast of himself gets rid of the pain of being a man."
Samuel Johnson
In our artificial economy real things do not matter so much, but politics and managing the
perceptions of the public are of paramount importance. And so the 'Goldilocks' Jobs Report, which
is how the business TV channels described that lukewarm piece of dreck, did little to rally the markets
except fleetingly intraday.
In the first chart below I take a look inside that 'average hourly earnings growth' number.
The headline includes ALL employees, but if you take out the top 15-20% of managers, the average
hourly earning growth showed a pronounced downward divergence to a lower growth rate. The BLS switched
to this number including all employees a few years ago from the non-supervisory number. As a rule
of thumb, when someone shows you the 'average' number, find out the median number for the same sample.
Especially in these days of historically high inequality.
Be that as it may, the markets overall were in a flight to safety as the financiers bowed to their
fears of the upcoming presidential election, that something might happen that will upset their status
quo.
so when people criticize the big deflation in
computer/electronics hardware using baseless measures like
"if the computer has a processor twice as fast then it has
fallen by half in price" they are wackos. but now the real
growth that is artificially generated by this way (quality
improvements) to keep inflation down is being criticized by
Fox. Of course it is completely made up growth. the absurdity
of the economists deal with price inflation. now years later,
everyone realizes we have all taken a big fall in living
standards no matter how many gigahertz my stupid computer is.
Manufacturing hasn't boomed since the 60's. The FRED graphs
are garbage and useless in general. They are improperly
calculated and they have out right admitted they may have
"problems".
Manufacturing is dying out and becoming automated over the
decades. There is no such thing as artificial growth either.
Demand based on consumption is just as valid as industrial
production shipped to other countries.
"The FRED graphs are garbage and useless in general."
No -
your comments are garbage and useless. Actually READ the
post. He did not get his graphs or data from FRED. Seriously
- you need professional help.
poppycock. the garbage on their industrial production chart
in the 90's and 00's was stupid bad. The US hasn't had a
industrial boom since the 60's when our consumption was
surging while we still made most of our products. No wonder
inflation surged by the late 60's. The war against communism
was having a painful bad side effects to rentiers and
bankers, which spread to capital by the late 60's.
"the garbage on their industrial production chart in the 90's
and 00's was stupid bad."
Can we focus on the single word
"their". You think he used FRED. No jackass, he made his own
charts from the source data - BLS. But noooooooo - you are
too stupid to get even this simple point. So the rest of your
ramblings is nothing more than your usual intellectual
garbage.
Auto mfg dropped by half post 2008.
It is now back but has nowhere to grow.
Urbanization makes cars less necessary and less desirable
There is not enough room to park them all now.
People who earn MinWage cannot afford them
Interesting point but many will overinterpret this. Leave in
the expansion of computer and electronics manufacturing value
add, and we have manufacturing output slightly expanding.
Take it out entirely and we have manufacturing output
basically steady.
The difference isn't telling an important
macro story.
The important macro story is the major decline in
manufacturing employment, and that has two big and one
smaller causes.
The two big factors are the increased productivity of
manufacturing globally and the declining share of
manufactured products as a % of GDP globally. The smaller
factor is the US's declining share of global manufacturing
output, which itself is only fractionally attributable to
trade policy.
I don't know anyone who says US manufacturing is
"booming." It certainly isn't. It's treading water. It's
growing slowly as the economy grows, but we can predict with
high confidence that it will continue to contract as a share
of total output over time, because that has been the secular
trend for decades and there's no reason to expect that to
change.
The only big question is how we adapt to the world as it
actually is.
Also, I did not realize I was being presented
with an argument about Chinese growth and sustainability. I
foolishly stopped reading and I am entirely sorry. I have set
down data and begun to answer the argument below on Links:
What is significant though is how China insists on holding to
growth targets that are very likely not sustainable.
Stability is a worthy aim but when growth is achieved through
pushing bad private sector loans, that is ultimately the
enemy of stability.
[ For these 39 past years China has
been holding to and achieving growth targets that were
repeatedly considered unsustainable so I prefer to figure out
why Chinese growth targets have been and from my perspective
are now sustainable. ]
the forgotten spirit of American protectionism :
, -1
YES! Of course US manufacturing isn't booming - how could it?
We have horrible economic policies that are focused almost
entirely on destroying our industrial base. High overvalued
currency, combined with 0% tariffs and we have no VAT, so
foreign imports from countries with a VAT receive export
subsidies but are not taxed on the US side. That we have even
one factory left is amazing and testament to the quality of
American workers. Under Clinton, we'll lose what's left.
Trump is our only hope. If we don't get Trump's protectionism
we will quickly become a country as poor as Armenia or
Moldova - stripped of industry and wealth, dependent on
remittances from our migrant workers in Asia and Europe.
"... Of course it is completely made up growth. the absurdity of the economists deal with price inflation. now years later, everyone realizes we have all taken a big fall in living standards no matter how many gigahertz my stupid computer is. ..."
"... The important macro story is the major decline in manufacturing employment, and that has two big and one smaller causes. ..."
"... I don't know anyone who says US manufacturing is "booming." It certainly isn't. It's treading water. It's growing slowly as the economy grows, but we can predict with high confidence that it will continue to contract as a share of total output over time, because that has been the secular trend for decades and there's no reason to expect that to change. ..."
No, U.S. Manufacturing Isn't Really Booming :...[Is]American manufacturing .. in decline?
An answer frequently offered by wonky economics journalists is that, no, U.S. manufacturing output
has actually kept growing. ...
There's a catch, though. As economist Susan N. Houseman of the W.E. Upjohn Institute for Employment
Research ...
points out , about half of the growth in U.S. manufacturing output since 1997 has been in
just one sector: computer and electronics manufacturing.
If it weren't for computers and electronics (which includes semiconductors), manufacturing
output would still be well below its 2008 peak and only 21 percent higher than in 1997...
The ... way those computers-and-electronics numbers are arrived at is worthy of a closer look.
... Without adjusting for deflation, value added in computer and electronics manufacturing is
up 45 percent since 1997. With the adjustments, it's up 699 percent! What's happening here is
that the Bureau of Economic Analysis has been trying to account for vast improvements in ... quality...
Writes Houseman:
Such quality adjustment ... can make the numbers difficult to interpret..., figures that exclude
this industry ... arguably provide a clearer picture of trends in manufacturing output.
As it stands now, those trends don't look impressive. U.S. manufacturing output has held up
a lot better than manufacturing employment. But it definitely isn't booming.
so when people criticize the big deflation in computer/electronics hardware using baseless
measures like "if the computer has a processor twice as fast then it has fallen by half in price"
they are wackos. but now the real growth that is artificially generated by this way (quality improvements)
to keep inflation down is being criticized by Fox.
Of course it is completely made up growth. the absurdity of the economists deal with price
inflation. now years later, everyone realizes we have all taken a big fall in living standards
no matter how many gigahertz my stupid computer is.
Auto mfg dropped by half post 2008. It is now back but has nowhere to grow. Urbanization makes
cars less necessary and less desirable
There is not enough room to park them all now. People who earn MinWage cannot afford them
Interesting point but many will overinterpret this. Leave in the expansion of computer and electronics
manufacturing value add, and we have manufacturing output slightly expanding. Take it out entirely
and we have manufacturing output basically steady.
The difference isn't telling an important macro story.
The important macro story is the major decline in manufacturing employment, and that has
two big and one smaller causes.
The two big factors are the increased productivity of manufacturing globally and the declining
share of manufactured products as a % of GDP globally. The smaller factor is the US's declining
share of global manufacturing output, which itself is only fractionally attributable to trade
policy.
I don't know anyone who says US manufacturing is "booming." It certainly isn't. It's treading
water. It's growing slowly as the economy grows, but we can predict with high confidence that
it will continue to contract as a share of total output over time, because that has been the secular
trend for decades and there's no reason to expect that to change.
The only big question is how we adapt to the world as it actually is.
Also, I did not realize I was being presented with an argument about Chinese growth and sustainability.
I foolishly stopped reading and I am entirely sorry. I have set down data and begun to answer
the argument below on Links:
What is significant though is how China insists on holding to growth targets that are very likely
not sustainable. Stability is a worthy aim but when growth is achieved through pushing bad private
sector loans, that is ultimately the enemy of stability.
[ For these 39 past years China has been holding to and achieving growth targets that were
repeatedly considered unsustainable so I prefer to figure out why Chinese growth targets have
been and from my perspective are now sustainable. ]
the forgotten spirit of American protectionism : , -1
YES! Of course US manufacturing isn't booming - how could it? We have horrible economic policies
that are focused almost entirely on destroying our industrial base. High overvalued currency,
combined with 0% tariffs and we have no VAT, so foreign imports from countries with a VAT receive
export subsidies but are not taxed on the US side. That we have even one factory left is amazing
and testament to the quality of American workers. Under Clinton, we'll lose what's left. Trump
is our only hope. If we don't get Trump's protectionism we will quickly become a country as poor
as Armenia or Moldova - stripped of industry and wealth, dependent on remittances from our migrant
workers in Asia and Europe.
48% of Trump supporters "completely distrust the economic data reported by the federal government"
including unemployment, spending, jobs. https://t.co/5l9GhucBFI
- Justin Wolfers (@JustinWolfers)
October
15, 2016
That tweet and the
linked article got my attention (no trust of data by 25% of adults!) ... Still why reflect
on this? ... so much else to get stuck on these days. First, I use official statistics in my work
A LOT; second, I am always on the look out for new survey insights; and finally, I am a bit
obsessed lately with models
in which people are not acting on the same information. This level of distrust is troubling
... even though I doubt it's new or entirely about the data ... I want us to think about WHY.
I study consumer behavior as an economist, which in 2016 still means reading lots of research
with dynamic optimization and Euler equations. This is a typical
early morning
ritual for me, that quiet time before my kids wake up when I can still imagine a world in
which we know everything about everything, including ourselves, and we choose calmly and appropriately.
BUT I balance out my openness to such models with a determination to also understand what people
ACTUALLY do and think.
Nevertheless, I am picky about the survey insights that I absorb, pass on, and try to understand.
My cognate in grad school
was survey methodology and I still write survey questions in my research ... thus I understand
how much responses can be manipulated, or even carelessly biased by poor methods and human nature.
Also I want to know what people think, not what someone writing up the survey results wants me
as a reader to think. (I'm not a fan of the tweet, by the way.) So I googled and found the
survey's homepage
, a Marketplace-Edison Research poll designed to measure economic anxiety. And, I found a
description of the
methods AND the
full survey too (see page 30 for this question). It's not the micro data online, so I can't
replicate the statistic in the tweet, but I could see that the "data trust" question was asked
before voting intentions or political affiliation. I have learned from pollsters that
asking about politics conjures up an identity that can be hard to shake in the rest of the survey.
The main roadblock I see in interpreting the data distrust is this survey's short time series;
it only began last fall as a quarterly survey. My hunch is that distrust of economic data is nothing
new but I can't prove that here. Plus changes in attitudes are often more informative than a snapshot,
since subjective questions are tricky to interpret. What does it mean to "trust data" anyway?
Do you trust data?
To be clear, I am not justifying anyone's views, but I am also trying not to be judgmental.
A key principle of surveying is not to make people feel bad or shameful about their views. Because,
guess what, if you do, they are less likely to tell you what they think or did ... then you are
fighting blind and may miss the chance to learn why we sometimes see the world differently. I
am not in the 25% of adults who have "no trust at all" in economic statistics from the
government. In fact, I am in a rare set of adults who spends more time on the
Bureau of Economic Analysis ' website sorting
through spending data than on Amazon adding to it. So what's up with all this distrust? I have
a few hypotheses to take to the data.
Hypothesis 1: government economic data don't match people's life
Sometimes I think the Representative Agent is a frenemy of economists. (Oh, not the
Twitter persona , he's great, but
the concept.) How can a simplifying assumption ... a focus on the typical or aggregate household
... be an enemy in disguise? Well, sometimes it gives theoretical models the focus they need and
other times, especially in empirical work, it glosses over important details. Details, also known
as people . So maybe distrust of economic data comes from not seeing your life experience
in the numbers that roll across the screen. National aggregates get a lot of attention, so maybe
it is minorities that end of distrusting data more, data that doesn't tell their story as loudly.
Not so, at least in terms of data about the economy, minorities are more trusting
than whites. Only 15 percent of African-American have no trust at all in economic data almost
half the fraction of whites. And among Hispanics, only12 percent have complete distrust of data.
With whites comprising over 70 percent of all adults, they are well represented in both aggregate
statistics and the distrust of them. Of course, this is just one cut of the data and not seeing
your life experience in the data may raise other issues (more below). Government agencies have
made a push to improve regional statistics
and even make
neighborhood data more readily accessible and help improve local decision making. And of course,
lots of household level surveys exist too. Another reason to take distrust (or even disinterest)
in government economic data seriously is that the quality of the data we have depends on people's
participation in our surveys. Response rates on numerous surveys
have been falling and
research
suggests that non response could impact official statistics, making them a less accurate reflection
of life experiences.
Hypothesis 2: distrust stems from people being "hurt" by data
One the first Friday of the every month, my Twitter feed is overflowing with chatter about
the latest employment report from the Bureau of
Labor Statistics . That makes me weird. I firmly believe that few people absorb the government
statistics in the way that I and my fellow econos do. Why should they? People confront economic
data when it affects them. One example I can think of is the cost-of-living adjustment, such as
for Social Security benefits. That came to mind when I looked at data distrust by age.
Older people are much more likely to distrust the data ... the exact opposite of learning over
time that statistics are reliable. But maybe the fact that in three years since 2010, including
this past year, there was no cost-of-living
adjustment to benefits had led some seniors to "distrust" government data, like the CPI-W?
Again, this hypothesis would be a lot better to test with a time series of data, comparing years
with benefit increases and without. But feeling shortchanged by the data may be understandable
given wide variation relative price changes , few of us exactly consume the representative
basket. Alternatively, as risk aversion appears to rise with age, maybe so too does distrust?
I wrote earlier that age is
more than just a number , the impact of demographic change deserves more study.
Hypothesis 3: it's not the data, it is the way we use them ... the spin
I don't trust data, I trust people. And even then, trust but verify, right? Perfectly measured
data (dream, dream), can be still be suspect. In fact, data can codify a lot of the biases and
mistakes we have made together in the past. Maybe we should also be concerned for the people who
"completely trust" government economic data? (Do read
Cathy O'Neil's book on
Big Data and algorithms.) Yet, I suspect the distrust in the survey is not about data construction
(I've never seen a protest at the ever-interesting
BEA advisory committee meetings
) ... or even about the government employees who construct the statistics in excruciating
detail, and in line with
international
standards . I bet the distrust is more about how the numbers are interpreted and how they
are used in policy making. Drawing conclusions from data is hard and reasonable disagreement is
to be expected. As just one example, the seasonally-adjusted unemployment rate for African Americans
was 8.3 in September
, which is below its average of 10.8 percent over the past 20 years but is almost double the
4.4 percent unemployment rate of whites. Should we call that 8.3 (or 4.4, for that matter) victory
or 'full employment'? And is the unemployment rate even the right statistic to assess? Relative
to the past it may well be but the past can be an imperfect guide for the future. Every data point
has its shortcoming, especially where there is no clear counterfactual or agreed upon target.
My "moderate" growth could easily be your "weaker-than-expected" growth. And, of course, on top
of honest disagreements about data, plenty of motivated reasoning is done with numbers. BUT when
we start with the same data, there are at least some bounds on the disagreement. In contrast,
when government data are wholesale rejected one quarter of adults, it's no surprise that we aren't
living in the same world. And we stop trying to understand each other. I would be lost (and bored
out of my mind) in my work on consumer behavior without data. You don't want me extrapolating
from my tiny circle of experience ... and frankly no one should make decisions with that little
information. We can learn a lot from the data, including these attitudinal surveys. And data adds
accountability, including in how its collected. Even so, no one likes to feel manipulated or,
worse, written off, especially with numbers.
Data can't solve problems but maybe it holds clues to a path forward ... to rebuild trust.
**Opinions here are mine and should not to be attributed to anyone with whom I work.**
Is it just not done to ask people why they distrust Government figures ?
2016-10-17, Stuart Gibson The same thing happened here in Italy with Silvio Berlusconi. He got
a lot of reforms but a lot of people ignored facts.
2016-10-17, pietro No one 'trusts' data. We all have confidence intervals.
This combined with your point number 3 is the main issue I suspect.
Point number 1 is also in play, I think point 2 is essentially irrelevant, it might be true for
some data, but not for data.
As far as economics goes, people intuitively understand that economics attempts to push the envelope
and use data to draw conclusions that are not really addressable with the data. Economists don't
even have agreement on how data is used - thinking mostly of macro. I see no reason to puzzle
on this until you can get economists to all agree. I don't mean this as a challenge, just a description
of the situation.
2016-10-17, Dan The headline unemployment number is obviously false, and this affects confidence
in the other numbers.
There is no particular mystery about what is going on.
2016-10-17, Dave Chapman Because your aggregated statistics does not reflect the experience of
the individuals:
"But several underlying factors also appear to have contributed to the closeness of the race.
For starters, many Americans are economically worse off than they were a quarter-century ago.
The median income of full-time male employees is lower than it was 42 years ago, and it is increasingly
difficult for those with limited education to get a full-time job that pays decent wages.
Indeed, real (inflation-adjusted) wages at the bottom of the income distribution are roughly where
they were 60 years ago. So it is no surprise that Trump finds a large, receptive audience when
he says the state of the economy is rotten. But Trump is wrong both about the diagnosis and the
prescription. The US economy as a whole has done well for the last six decades: GDP has increased
nearly six-fold. But the fruits of that growth have gone to a relatively few at the top – people
like Trump, owing partly to massive tax cuts that he would extend and deepen. "
https://www.project-syndicate.org/commentary/trump-candidacy-message-to-political-leaders-by-joseph-e--stiglitz-2016-10
2016-10-17, PSteele
"... In the West, the priority accorded to the individualist self-regarding norms underlying the Washington Consensus created a nurturing environment for growth in corruption, inequality, and mistrust in governing elites – the unintended consequences of rational-choice, me-first premises. With the emergence in advanced economies of disorders previously associated with developing countries, Swedish political scientist Bo Rothstein has petitioned the Academy of Sciences (of which he is a member) to suspend the Nobel Prize in economics until such consequences are investigated." ..."
Interesting read on the history of the Nobel Prize in
Economics and its ideological tendency:
Avner Offer: "a
group of center-right economists captured the process of
selecting prizewinners...The prize kingmaker was Stockholm
University economist Assar Lindbeck, who had turned away from
social democracy. During the 1970s and 1980s, Lindbeck
intervened in Swedish elections, invoked microeconomic theory
against social democracy, and warned that high taxation and
full employment led to disaster. His interventions diverted
attention from the grave policy error being made at the time:
deregulation of credit, which led to a deep financial crisis
in the 1990s and anticipated the global crisis that erupted
in 2008.
Lindbeck's concerns were similar to those of the
International Monetary Fund, the World Bank, and the US
Treasury. These actors' insistence on privatization,
deregulation, and liberalization of capital markets and trade
– the so-called Washington Consensus – enriched business and
financial elites, led to acute crises, and undermined
emerging economies' growth.
In the West, the priority accorded to the individualist
self-regarding norms underlying the Washington Consensus
created a nurturing environment for growth in corruption,
inequality, and mistrust in governing elites – the unintended
consequences of rational-choice, me-first premises. With the
emergence in advanced economies of disorders previously
associated with developing countries, Swedish political
scientist Bo Rothstein has petitioned the Academy of Sciences
(of which he is a member) to suspend the Nobel Prize in
economics until such consequences are investigated."
Spirited defense of the establishment from one of financial oligarchy members.
" The economy overall is doing just fine." Does this include QE? If the Fed is pouring
billions of new money into the economy, how accurate is it to say that the economy
is doing just fine?
Notable quotes:
"... "That was a number that was devised, statistically devised, to make politicians - and in particular, presidents - look good. And I wouldn't be getting the kind of massive crowds that I'm getting if the number was a real number." ..."
"... In the 1950s and 1960s, for instance, organized labor was fairly convinced that the government was purposely underestimating inflation and the cost of living to keep Social Security payments low and wages from rising. George Meany, the powerful head of the American Federation of Labor at the time, claimed that the Bureau of Labor Statistics, which compiled both employment and inflation numbers, had "become identified with an effort to freeze wages and is not longer a free agency of statistical research." ..."
"... Employment figures are sometimes seen as equally suspect. Jack Welch, the once-legendary former CEO of GE, blithely accused the Obama administration of manipulating the final employment report before the 2012 election to make the economic recovery look better than it was. "Unbelievable jobs numbers … these Chicago guys will do anything … can't debate so change numbers," he tweeted ..."
"... His arguments were later fleshed out by New York Post columnist John Crudele , who went on to charge the Census Bureau (which works with BLS to create the samples for the unemployment rate) with faking and fabricating the numbers to help Obama win reelection. ..."
"... The chairman of the Gallup organization, Jim Clifton, sees so many flaws with the way unemployment is measured that he has called the official rate a "Big Lie." In the Democratic presidential campaign, Bernie Sanders has also weighed in, saying the real unemployment rate is at best above 10 percent. ..."
"... What a useless article. The author explains precisely nothing about what the official statistics do and do not measure, what they miss and what they capture. ..."
"... I had the same impression as well. Notice he does not mention that the Gallop number is over 10% and is based on their polling data. ..."
"... But never mentioned that Reagan changed how Unemployment was figured in the early 80's. He included all people in the military service, as employed. Before that, they was counted neither way. He also intentionally left out that when Obama, had the unemployed numbers dropped one month before the election, from 8.1% to 7.8% --because it was believed that no one could be reelected if it was above 8%. ..."
"... U6 is 9.8% for March 2016. We still have 94 million unemployed and you want to say its 5 % what journalistic malpractice. ..."
"... Trump has emphasized that he is looking at the percent of the population that is participating in the workforce - and that this participation rate is currently at historical lows -- and Trump has been clear that his approach to paying down the national debt is based on getting the participation rates back to historical levels ..."
"... "The government can't lie about a hundred billion dollars of Social Security money stolen for the Clinton 'balanced budget', that would be a crime against the citizens, they would revolt. John, come one now. " ..."
"... I didn't say it first, Senator Ernest Hollings did, on the Senate floor. ..."
"... And here is how they did it: http://www.craigsteiner.us/articles/16 ..."
"... There is plenty of evidence the figures are cooked, folks, enough to fill a book: Atlas Shouts. Don't believe trash like this article claims. GDP, unemployment and inflation are all manipulated numbers, as Campbell's Law predicts. ..."
"... I can't believe the Washington Post prints propaganda like this. ..."
"... I do remember when the officially-announced unemployment rate stopped including those who were no longer looking for work. That *was* a significant shift, and there's no doubt it made politicians (Reagan, I think it was) look better; of course, no President since then has reversed it, as it would instantly make themselves look worse. ..."
"... Working one hour a week, at minimum wage, is 'employed', according to the government. No wonder unemployment is at 5%. ..."
"... Add in people who are working, but want and need full time jobs, add in people who have dropped out of the labor market and/or retired earlier than they wanted to, and unemployment is at least 10%. Ten seconds on Google will show you that. ..."
"... The writer should be sacked for taking a very serious issue and turning it into a piece of non-informative fluff. Bad mouthing Trump and Sanders is the same as endorsing Hilly. ..."
Yes, Donald Trump is wrong about unemployment. But he's not the only one. -
The Washington Post
Listen to President Obama, and you'll hear that job growth is stronger than
at any point in the past 20 years, and - as
he said in his final State of the Union address - "anyone claiming that
America's economy is in decline is peddling fiction."
Listen to Donald Trump and you'll hear something completely different. The
billionaire Republican candidate for president told The Washington Post last
week that
the economy is one big Federal Reserve bubble waiting to burst, and that
as for job growth, "we're not at 5 percent unemployment. We're at a number that's
probably into the 20s if you look at the real number." Not only that, Trump
said, but the numbers are juiced: "That was a number that was devised, statistically
devised, to make politicians - and in particular, presidents - look good. And
I wouldn't be getting the kind of massive crowds that I'm getting if the number
was a real number."
It's easy enough to dismiss - as a phalanx of economists and analysts
did - Trump's claims as yet another one of his all-too-frequent campaign
lines that have little to do with reality. But with this one, at least, Trump
is tapping into a deep and mostly overlooked well of popular suspicion of government
numbers and a deeply held belief that what "we the people" are told about the
economy by the government is
lies, damn
lies and statistics designed to benefit the elite at the expense of the
working class. The stubborn persistence of these beliefs should be a reminder
that just because the United States is doing well in general, that doesn't mean
everyone in the country is. It's also a warning to experts and policymakers
that in the real world,
there is no "the economy," there are many, and generalizations have a way
of glossing over some very rough patches.
Since the mid-20th century, when the U.S. government began keeping
and compiling our modern suite of economic numbers, there has been constant
skepticism of the reports, coming from different corners depending on economic
trends and the broader political climate. In the 1950s and 1960s, for instance,
organized labor was fairly convinced that the government was purposely underestimating
inflation and the cost of living to keep Social Security payments low and wages
from rising. George Meany, the powerful head of the American Federation of Labor
at the time, claimed that the Bureau of Labor Statistics, which compiled both
employment and inflation numbers, had "become identified with an effort to freeze
wages and is not longer a free agency of statistical research."
Over the decades, those views hardened. Throughout the 1970s, as workers
struggled with unemployment and stagflation, the government continually tweaked
its formulas for measuring prices. By and large, these changes and new formulas
were designed to make the figures more accurate in a fast-changing world. But
for those who were already convinced the government was trying to paint a deliberately
false picture, the tweaks and innovations were interpreted as a devious way
to avoid spending money to help the ailing middle class, not trying to measure
what was actually happening to design policies to help address it. The commissioner
of BLS at the time, Janet Norwood, dismissed those concerns
in testimony to Congress in the late 1970s, saying that when people don't
get the number they want, "they feel there must be something wrong with the
indicator itself."
Employment figures are sometimes seen as equally suspect. Jack Welch,
the once-legendary former CEO of GE,
blithely accused the Obama administration of manipulating the final employment
report before the 2012 election to make the economic recovery look better than
it was. "Unbelievable jobs numbers … these Chicago guys will do anything … can't
debate so change numbers," he tweeted after that last October report showed
better-than-expected job growth and lower-than-anticipated unemployment rate.
His arguments were later fleshed out by New York Post columnist
John Crudele, who went on to charge the Census Bureau (which works with
BLS to create the samples for the unemployment rate) with faking and fabricating
the numbers to help Obama win reelection.
These views are not fringe. Type the search terms "inflation
is false" into Google, and you will get reams of articles and analysis from
mainstream outlets and voices, including investment guru Bill Gross (who referred
to inflation numbers as a "haute
con job"). Similar results pop up with the terms "real
unemployment rate," and given how many ways there are to count employment,
there are legitimate issues with the headline number.
The cohort that responds to Trump reads those numbers in a starkly different
light from the cohort laughing at him for it. Whenever the unemployment rate
comes out showing improvement and hiring, those who are experiencing dwindling
wages and shrinking opportunities might see a meticulously constructed web of
lies meant to paint a positive picture so that the plight of tens of millions
who have dropped out of the workforce can be ignored. The chairman of the
Gallup organization, Jim Clifton, sees so many flaws with the way unemployment
is measured that he has called the
official rate a "Big Lie." In the Democratic presidential campaign,
Bernie Sanders has also weighed in, saying the real unemployment rate is
at best above 10 percent.
Beneath the anger and the distrust - which extend to a booming stock market
that helps the wealthy and banks flush with profit even after the financial
crisis - there lies a very real problem with how economists, the media and policymakers
discuss economics. No, the bureaucrats in the Labor and Commerce departments
who compile these numbers aren't a cabal engaged in a cover-up. And no, the
Fed is not an Illuminati conspiracy. But the idea that a few simple big numbers
that are at best averages to describe a large system we call "the economy" can
adequately capture the stories of 320 million people is a fiction, one that
we tell ourselves regularly, and which millions of people know to be false to
their own experience.
It may be true that there is a national unemployment rate measured at
5 percent.
But it is also true that for white men without a college degree, or white men
who had worked factory jobs until the mid-2000s with no more than a high school
education, the unemployment reality is much worse (though it's even worse for
black
and Hispanic men, who don't seem to be responding by flocking to Trump in
large numbers). Even when those with these skill sets can get a job, the pay
is woefully below a living wage. Jobs that don't pay well still count, in the
stats, as jobs. Telling people who are barely getting by that the economy is
just fine must appear much more than insensitive. It is insulting, and it feels
like a denial of what they are experiencing.
The chords Trump strikes when he makes these claims, therefore, should be
taken more seriously than the claims themselves. We need to be much more diligent
in understanding what our national numbers do and do not tell us, and how much
they obscure. In trying to hang our sense of what's what on a few big numbers,
we risk glossing over the tens of millions whose lives don't fit those numbers
and don't fit the story. "The economy" may be doing just fine, but that doesn't
mean that everyone is. Inflation might be low, but millions can be struggling
to meet basic costs just the same.
So yes, Trump is wrong, and he's the culmination of decades of paranoia and
distrust of government reports. The economy overall is doing just fine.
But people are still struggling. We don't have to share the paranoia or buy
into the conspiratorial narrative to acknowledge that. A great nation, the one
Trump promises to restore, can embrace more than one story, and can afford to
speak to those left out of our rosy national numbers along with those whose
experience reflect them.
the3sattlers, 4/8/2016 1:05 PM EDT
" The economy overall is doing just fine." Does this include QE? If the
Fed is pouring billions of new money into the economy, how accurate is it
to say that the economy is doing just fine?
james_harrigan, 4/8/2016 10:14 AM EDT
What a useless article. The author explains precisely nothing about
what the official statistics do and do not measure, what they miss and what
they capture.
Derbigdog, 4/8/2016 11:40 AM EDT
I had the same impression as well. Notice he does not mention that
the Gallop number is over 10% and is based on their polling data.
captdon1, 4/8/2016 5:51 AM EDT
Not reported by WP
The first two years of Obama's presidency Democrats controlled the house
and Senate. The second two years, Republicans controlled the Senate. The
last two years of Obama's term, the Republicans controlled house and Senate.
During this six years the national debt increase $10 TRILLION and the Government
collected $9 TRILLION in taxes and borrowed $10 TRILLION. ($19 Trillion
In Six Years!!!) (Where did our lovely politicians spend this enormous amount
of money??? (Republicans and Democrats!)
reussere, 4/8/2016 1:43 AM EDT
Reading the comments below it strikes me again and again how far out
of whack most people are with reality. It's absolutely true that using a
single number for the employment rate reflects the overall average of the
economy certainly doesn't measure how every person is doing, anymore than
an average global temperature doesn't measure any local temperatures.
One thing not emphasized in the article is that there is a number of
different statistics. The 5% figure refers to the U-3 statistic. Nearly
all of the rest of the employment statistics are higher, some considerably
so because they include different groups of people. But when you compare
U-3 from different years, you are comparing apples and apples. The rest
of the numbers very closely track with U-3. That is when U-3 goes up and
down, U-6 go up and down pretty much in lockstep.
It is unfortunate that subpopulations of Americans are doing far worse
(and some doing far better) than average. But that is the nature of averages
after all. It is simply impossible for a single number (or even a group
of a dozen different employment measurements) to accurately reflect a complex
reality.
Smoothcountryside, 4/8/2016 12:04 PM EDT
The alternative measures of labor underutilization are defined as U-1
through U-6 with U-6 being the broadest measure and probably the closes
to the "true" level of unemployment. Otherwise, all the rest of your commentary
is correct.
southernbaked, 4/7/2016 11:02 PM EDT
Because this highly educated writer is totally bias, he left out some
key parts, I personally lived though. He referred back to the late 70's
twice. But never mentioned that Reagan changed how Unemployment was
figured in the early 80's. He included all people in the military service,
as employed. Before that, they was counted neither way. He also intentionally
left out that when Obama, had the unemployed numbers dropped one month before
the election, from 8.1% to 7.8% --because it was believed that no one could
be reelected if it was above 8%.
Then after he was sworn in--- in January, they had to readjust the numbers
back up. They blamed it on one employees mistakes-- PS. no one was fired
or disciplined for fudging. Bottom line is, for every 1.8 manufacturing
job, there are 2 government jobs, that is disaster. Because this writer
is to young to have lived in America when it was great. When for every 1
government job, you had 3 manufacturing jobs.
I will enlighten him. I joined the workforce -- With no higher education
-- when you merely walked down the road, and picked out a job. Because jobs
hang on trees like apples. By 35 I COMPLETELY owned my first 3 bedroom brick
house, and the 2 newer cars parked in the driveway. Anyone care to try that
now ??
As for all this talk about education-- I have a bit of knowledge about
that subject-- because I paid in full to send all under my roof through
it. Without one dime of aide from anyone. The above writer is proof-- you
can be heavily educated, and DEAD WRONG. There is nothing good about this
economy. Signed, UN-affiliated to either corrupted party
Bluhorizons, 4/7/2016 9:43 PM EDT
"we're not at 5 percent unemployment. We're at a number that's probably
into the 20s if you look at the real number." Trump is correct. The unemployment
data is contrived from data about people receiving unemployment compensation
but the people who's unemployment has ended and people who have just given
up is invisible.
"It may be true that there is a national unemployment rate measured at
5 percent. But it is also true that for white men without a college degree,
or white men who had worked factory jobs until the mid-2000s with no more
than a high school education, the unemployment reality is much worse "
The author goes on and on about the legitimate distrust of government
unemployment data and then tells us Trump is wrong. But the article convinces
us Trump is right! So, this article its not really about the legitimate
distrust of government data is is about the author's not liking Trump. Typical
New Left bs
Aushax, 4/7/2016 8:24 PM EDT
Last jobs report before the 2012 election the number unusually dropped
then was readjusted up after the election. Coincidentally?
George Mason, 4/7/2016 8:15 PM EDT
U6 is 9.8% for March 2016. We still have 94 million unemployed and
you want to say its 5 % what journalistic malpractice.
F mackey, 4/7/2016 7:57 PM EDT
hey reporter,Todays WSJ, More than 40% of the student borrowers aren't
making payments? WHY? easy,they owe big $ money$ & cant get a job or a well
paying job to pay back the loans,hey reporter,i'd send you $10 bucks to
buy a clue,but you'd probably get lost going to the store,what a %@%@%@,another
reporter,who doesn't have a clue on whats going on,jmo
SimpleCountryActuary, 4/7/2016 7:57 PM EDT
This reporter is a Hillary tool. Even the Los Angeles Times on March
6th had to admit:
"Trump is partly right in saying that trade has cost the U.S. economy
jobs and held down wages. He may also be correct - to a degree - in saying
that low-skilled immigrants have depressed salaries for certain jobs or
industries..."
If this is the quality of reporting the WaPo is going to provide, namely
even worse than the Los Angeles Times, then Bezos had better fire the editorial
staff and buy a new one.
Clyde4, 4/7/2016 7:34 PM EDT [Edited]
This article dismissing Trump is exactly what is wrong with journalism
today - all about creating a false reality for people instead of investigating
and reporting
Trump has emphasized that he is looking at the percent of the population
that is participating in the workforce - and that this participation rate
is currently at historical lows -- and Trump has been clear that his approach
to paying down the national debt is based on getting the participation rates
back to historical levels
The author completely ignored the big elephant in the room -- that is
irresponsible journalism
The author may want to look into how the unemployment rate shot up in
2008 when the government extended benefits and then the unemployment rate
plummeted again when unemployment benefits were decrease (around 2011, I
believe) - if I were the author I would do a little research into whether
the unemployment rate correlates with how much is paid out in benefits or
with unemployment determined through some other approach (like surveys
dangerbird1225, 4/7/2016 7:25 PM EDT
Bunch of crap. If you stop counting those that stop looking for a job,
your numbers are wrong. Period. Why didn't this apologist for statistics
mention that?
"The government can't lie about a hundred billion dollars of Social
Security money stolen for the Clinton 'balanced budget', that would be a
crime against the citizens, they would revolt. John, come one now. "
I didn't say it first, Senator Ernest Hollings did, on the Senate
floor.
"Both Democrats and Republicans are all running this year and next
and saying surplus, surplus. Look what we have done. It is false. The
actual figures show that from the beginning of the fiscal year until
now we had to borrow $127,800,000,000." - Senate speech, Democratic
Senator Ernest Hollings, October 28, 1999
Go to New Orleans Chicago Atlanta Los Angeles Detroit stop anybody on
the street and ask if unemployment is 5% and that there is a 95% chance
a guy can get a job.
Then you will have a statistic reference point. Its not a Democratic
or republican issue because both of them have manipulated the system for
so long its meaningless. Go Trump 2016 and get this crap sorted out with
common sense plain English
AtlasRocked, 4/7/2016 4:37 PM EDT
There is plenty of evidence the figures are cooked, folks, enough
to fill a book: Atlas Shouts. Don't believe trash like this article claims.
GDP, unemployment and inflation are all manipulated numbers, as Campbell's
Law predicts.
I can't believe the Washington Post prints propaganda like this.
TimberDave, 4/7/2016 2:23 PM EDT
I do remember when the officially-announced unemployment rate stopped
including those who were no longer looking for work. That *was* a significant
shift, and there's no doubt it made politicians (Reagan, I think it was)
look better; of course, no President since then has reversed it, as it would
instantly make themselves look worse.
astroboy_2000, 4/7/2016 1:28 PM EDT
This would be a much more intelligent article if the writer actually
said what the government considers as 'employed'.
Working one hour a week, at minimum wage, is 'employed', according
to the government. No wonder unemployment is at 5%.
Add in people who are working, but want and need full time jobs,
add in people who have dropped out of the labor market and/or retired earlier
than they wanted to, and unemployment is at least 10%. Ten seconds on Google
will show you that.
The writer should be sacked for taking a very serious issue and turning
it into a piece of non-informative fluff. Bad mouthing Trump and Sanders
is the same as endorsing Hilly.
Manchester0913, 4/7/2016 2:12 PM EDT
The number you're referencing is captured under U6. However, U3 is the
traditional measure.
Son House, 4/7/2016 2:24 PM EDT
The government doesn't claim that working one hour a week is employed.
Google U 3 unemployment. Then google U 6 unemployment. You can be enlightened.
Liz in AL, 4/7/2016 7:21 PM EDT
I've found this compilation of all 6 of the "U-rates" very useful. It
encompasses the most restrictive (and thus smallest) U-1 rate, though the
most expansive U-6. It provides brief descriptions of what gets counted
for each rate, and (at least for more recent years) provides the ability
to compare at the monthly level of detail.
U6 Unemployment Rate Portal Seven
"... Energy intensity of the World economy has decreased from 1970 to 2014. This is probably due to deindustrialization of the Western countries. Aka "growth of service economy." ..."
Energy intensity of the World economy has decreased from 1970 to 2014. Energy intensity is energy
consumed by the economy divided by the real GDP produced.
In 1970 314 tonnes of oil equivalent(toe) were needed for each million 2005$ of GDP produced and
by 2014 energy intensity had fallen to 225 toe per million 2005$ of GDP.
While you produce some fine charts, I hope you don't believe GDP and energy consumption will
continue higher indefinitely. Also I hope you realize GDP figures are overstated due to understated
inflation rates.
For example the policy of substitution says if top sirloin beef is too expensive, then we switch
to eating ground chuck. If chuck becomes too high, then its plain ole ground beef. Once ground
beef becomes too costly, then we switch to ground rat.
Lastly, why don't you add the debt into your equations and see what the trend lines look like.
No inflation is not understated, the Shadowstats stuff is not believable. If you believe the
Shadowstats CPI adjustment and us those numbers to find the real oil price from 1970 to 2012 and
do the same using the BLS CPI we get the following chart. Does the Shadowstats estimate for the
real oil price in 1980 look reasonable?
Energy intensity of the World economy has decreased from 1970 to 2014. This is probably due to deindustrialization of the Western countries. Aka "growth of service
economy."
"This is probably due to deindustrialization of the Western countries. Aka "growth of service
economy.""
The GLOBAL industrial production did not decrease, therefore, your argument does not make sense.
It is only useful in a national e.g. US-centric discussion.
Or if you actually check data for developed countries with quite different share of industry
to their GDP you do not see the correlation of low share of industry = low energy intensity!
As Ulenspiegel says correctly, for the World your point does not apply. The World Energy
intensity has fallen as I have used Global GDP and Global energy consumption.
As long as we don't do a lot of interplanetary trade, this estimate will be close enough.
:-)
GDP does not reflect only production (compare with GNI). It is completely different metric
which takes into account the "value" produced by financial services, prostitution (yes in some
countries income from prostitution is included into GDP; GB (3-4% or ~£10 billion) and Italy (2%
of national GDP) are two examples:
https://www.rt.com/news/161140-italy-drugs-prostitution-economy/
) and like.
GDP is defined as the total value of final goods and services produced within a territory
during a specified period (or, if not specified, annually, so that "the UK GDP" is the UK's
annual product). GDP differs from gross national product (GNP) in excluding inter-country income
transfers, in effect attributing to a territory the product generated within it rather than
the incomes received in it.
So the country with zero production in which people just wash dirty linen for each for remuneration
or trade on stock market has a positive GDP. Other classic example: if somebody marries his secretary
and she stays home to look after children GDP drops.
GDP never measures economic efficiency of the country; it measures the level of economic
activity. Healthcare is a classic example. The USA spends 20% to subsidize maladaptive behavior
between producers and consumers in the medical food chain. Another example is sales of high sugar
context flavored water called Coca Cola and Pepsi Cola. It is negatively affect children health
leading to obesity and early diabetes, but it is positively reflected in GDP. And then medical
expenses for treating diabetes further increase GDP. That brings us to the problem of conspicuous
consumption or consumption for the sake of status. Which in the USA is a real national epidemics
(Keeping up with Jones). Many other components of GDP (especially FIRE - finance, insurance and
real estate) are partially anti-social and their fast growth is a sign of the problems inherent
in neoliberal societies rather then social progress of the particular country. This is especially
true for the USA, which in this sense is the most wicked (aka neoliberal) country in the world.
This voodoo cult of GDP that dominates US economic discourse since 1991 is just a sign of the
level of degradation of economic science under neoliberalism.
In an article * on the Federal Reserve Board's decision to raise interest rates, the
Washington Post referred to the 2.4 percent median growth forecast of the Fed's Open Market
Committee. For example, last December their median forecast for growth in 2015 was 2.8 percent.
It now appears growth will be around 2.2 percent for the year. The Fed was not out of line with
other forecasts. For example the Congressional Budget Office, which quite explicitly tries to be
near the middle of major forecasts, forecast 2.9 percent growth for 2015.
"... The international Commission on the Measurement of Economic Performance and Social Progress, which I co-chaired and on which Deaton served, had earlier emphasized that GDP often is not a good measure of a society's wellbeing. These new data on white Americans' declining health status confirms this conclusion. The world's quintessential middle-class society is on the way to becoming its first former middle-class society. ..."
The basic perquisites of a middle-class life were increasingly beyond the reach of a growing
share of Americans. The Great Recession had shown their vulnerability. Those who had invested in
the stock market saw much of their wealth wiped out; those who had put their money in safe
government bonds saw retirement income diminish to near zero, as the Fed relentlessly drove down
both short- and long-term interest rates. With college tuition soaring, the only way their
children could get the education that would provide a modicum of hope was to borrow; but, with
education loans virtually never dischargeable, student debt seemed even worse than other forms of
debt.
... ... ...
The international Commission on the Measurement of Economic Performance
and Social Progress, which I co-chaired and on which Deaton served, had earlier
emphasized that GDP often is not a good measure of a society's wellbeing. These new data on
white Americans' declining health status confirms this conclusion. The world's quintessential
middle-class society is on the way to becoming its first former middle-class society.
What is the service sector? Mostly software, restaurants, banks, construction companies,
retailers, doctors and hospitals.
Can an economy thrive if it doesn't make or move physical
things? Intuitively the answer is no, because most of the services mentioned above either
maintain the status quo (like healthcare and restaurants) or (like houses) consume rather
than build capital. As for banking, in its current incarnation it's almost certainly
a net negative, draining capital from productive uses and funneling it to trading desks and political
action committees.
The US, in short, is engaged in an experiment to see how long an economy can function with services
growing and manufacturing contracting. As with so many of today's monetary and fiscal
experiments, no one knows when definitive results will come in. But the data so far aren't encouraging.
Noplebian
History shows when the fiat currency system reaches it's end cycle, there is always a call
for war. This one however, will wipe out billions!
"The US, in short, is engaged in an experiment to see how long an economy can
function with services growing and manufacturing contracting."
Should read:
"The US, in short, is engaged in an experiment to see how long an economy can function with
services growing and manufacturing contracting while the MSM tells us how awesome everything
is."
toady
Another "oldy-but-a-goody". This "transition from a manufacturing to a services economy"
has been going on since before NAFTA, and it's now almost finished we'll finally get to see
what the Reagan-Bush1 voodoo economics hath wrought.
Good times!
Amish Hacker
In politics, "definitive results" do not exist. Causes and effects can be, and are, argued
and denied ad infinitum , in spite of overwhelming evidence to the contrary. For example,
Cheney & the neocons still claim they did the right thing in Iraq & Afghanistan, and proudly
boast that they would do the same thing again today. Keynesian economists will argue that they
made no mistakes over the last 8 years, we just didn't apply their prescriptions aggressively
enough. And so on.
In politics, confirmation bias is the leading cause of blindness.
The apparent decoupling turns out to be mostly a mirage. It is true that rich countries outsource
some of the more energy and materials intensive operations to poor countries, but if you count back
from consumption, the rich countries are essentially as energy and materials dependent as they ever
were. For fossil fuels, the coefficient is 90 percent…a 90 point increase in fossil fuels is needed
for a 100 point increase in GDP.
Part of what happens can perhaps be understood by thinking about beef imports. If England imports
beef from Africa, then there is a great deal of materials and energy consumed in Africa to produce
the beef. Only a small percentage of the resource used gets exported to England. If you start with
the steak in England and look back at the supply chain, you find that the consumption of the pound
of steak in England was responsible for the consumption of lots of energy and materials in Africa.
I think that 'decoupling' is not the same as energy efficiency. Suppose, for example, that we
look at the efficiency with which firewood is burned in an ordinary house. Back in the olden days,
the wood was burned in a fireplace, which is inefficient. Then Franklin invented the Franklin stove
and heating became more efficient in terms of calories of usable heat per cord of wood. But the stove
wasn't necessarily any less or more expensive than the fireplace. Since GDP essentially measures
cash outlay, the increased efficiency doesn't necessary have any direct impact on GDP.
Recently, we have begun to adjust GDP for 'hedonic factors'. Suppose, for example, that one has
an old radio with lots of static and poor sound quality. Then one buys a new radio with better sound
quality. But suppose that the price you pay for the new radio is the same as it was for the old radio.
GDP would be the same for both radios. But, recently, the US government has begun to make adjustments
for the quality of the sound.
Whether the hedonic adjustments make any sense depends on what sort of question you are trying
to answer. If you are asking 'will my radio company be able to pay our debts?', then all that matters
is your actual income. The fact that you had to improve the sound quality in order to remain competitive
is an ancillary fact. If you are not getting any more income, then paying your debts doesn't get
any easier.
In their book,
The Spirit Level: Why Greater Equality Makes Societies Stronger (link is external), Professors
Richard Wilkinson and Kate Pickett, present data taken from multiple credible sources that show
the gap between the poor and rich the greatest in the U.S. among all developed nations; child
well being is the worst in the U.S. among all developed nations; and levels of trust among people
in the U.S. among the worst of all developed nations.
The Subcommittee on International Organizations, Human Rights and Oversight of the U.S.
Congress' House Committee on Foreign Affairs stated, after examining the issue of the U.S.'s declining
image abroad, "the decline in international approval of U.S. leadership is caused largely by opposition
to the invasion of Iraq, U.S. support for dictators, and practices such as torture and rendition.
They testified that this opposition is strengthened by the perception that our decisions are made
unilaterally and without constraint by international law or standards-and that our rhetoric about
democracy and human rights is hypocritical."
The US ranks 114th out of 125 countries in international peace and security.
To those in power who believe that only strength counts, and that people are always self-interested,
I say "We tried it your way, and it didn't work. Let's try something new."
Hi Dennis,
I see up there little discussion about GDP and what it means.
Let's say:
Country A: use washable rags to clean kitchen counter-tops.
Country B: use paper towels to clean same kitchen counter-tops.
As result they both have clean
kitchen counter-tops but Country B has higher GDP due to use of paper towels.
So GDP means absolutely nothing or anything depending what you want to present.
GDP is like looking at the sunset and your mind is thinking that you are actually looking at the
sunset. But it takes 8 minutes for sunlight to reach the earth and that sun that we think we are
looking at is already gone. (Since this site is loaded with scientist they can correct me with
if that 8 minutes is more or less correct
)
Anyway, mostly GDP is used by some "smart" people we call economist to tell us some "story".
For example they tell us: "You see sunny boy that GDP is big number this year, bigger than one
from last year. So you should be content and happy. Not convinced? Don't worry we will "super
size" that GDP for you next year. Isn't your tummy already feeling full and content?"
This kind of storytelling is usually printed as financial news about GDP. Meaningless if you
ask me from the point of average citizen.
I have to go now because I have whole day of work planned for me by this economy and I will
catch you later tonight to see your thoughts. Another thing that crosses my mind is how come that
we work more or at least the same now when oil is at $40 compared to when oil was $100 last year?
Wasn't the official meme that use of oil as our biggest invention beside sliced bread, made our
life easier so we actually work less and spent more time with family & friends and doing odd staff
like canoeing
How come I don't feel that I did not get 60% discount due to price of oil in terms of work load
from the last year
Who is pocketing that 60%
How about employed folks who bought kiwi Leaf? Do they work less and have more time with family
and friends or they are paddling in the same hamster wheel we call economy?
I agree GDP is a poor measure of well being. Another example would be World War 2 where
a lot of output was created to destroy stuff (tanks, bombs, planes, ships, guns, etc), then stuff
was destroyed, cities and other infrastructure in Europe and Asia and then it was rebuilt leading
to a lot of economic growth. Were we better off? Probably not, especially the millions who died
and their families.
GDP has many problems, beyond paper towels and paper plates and other wasteful (in my opinion)
uses of resources.
I did a different chart using the human development index (HDI) from 1980 to 2013 which shows
World primary energy use per unit of HDI(a dimensionless number) has been increasing roughly linearly,
not decreasing as is the case for energy intensity.
The HDI is also far from perfect as a measure of human welfare, but probably better than GDP.
"... A paper published earlier this year in Proceedings of the National Academy of Sciences proposes that even the relative decoupling we claim to have achieved is an artefact of false accounting. ..."
"... GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass. ..."
"... I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines. If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then the 2 lines on the graph will diverge. There is no decoupling. ..."
"... Javier's suggestion about debt is not correct. Really, really not correct. Debt is just accounting for various kinds of ownership and obligations. If this were the old Soviet Union, construction would happen based on a central plan, and there would be no debt at all, but there would still be GDP. ..."
"A paper published earlier this year in Proceedings of the National Academy of Sciences proposes
that even the relative decoupling we claim to have achieved is an artefact of false accounting.
It points out that governments and economists have measured our impacts in a way that seems irrational.
Here's how the false accounting works. It takes the raw materials we extract in our own countries,
adds them to our imports of stuff from other countries, then subtracts our exports, to end up
with something called "domestic material consumption". But by measuring only the products shifted
from one nation to another, rather than the raw materials needed to create those products, it
greatly underestimates the total use of resources by the rich nations.
For instance, if ores are mined and processed at home, these raw materials, as well as the
machinery and infrastructure used to make finished metal, are included in the domestic material
consumption accounts. But if we buy a metal product from abroad, only the weight of the metal
is counted. So as mining and manufacturing shift from countries such as the UK and the US to countries
like China and India, the rich nations appear to be using fewer resources. A more rational measure,
called the material footprint, includes all the raw materials an economy uses, wherever they happen
to be extracted. When these are taken into account, the apparent improvements in efficiency disappear."
VK, precisely. The US has been in a net-exergetic deficit in debt-money-based terms per capita
since the mid- to late 1960s to mid-1970s to mid-1980s, having compensated by increasing to an
unprecedented level to date debt to wages and GDP.
Moreover, the BEA-determined industry requirement costs as the basis of estimated gross and
real value-added output (what we refer to as GDP), adjusted for our net-exergetic deficit in debt-money
terms, the US has been in recession/"slow-motion depression" since Q4 2000-Q1 2001, and the world
since 2005-08.
Senior BEA, BLS, Commerce, White House economic advisors, CIA, NSA, military intelligence,
and Pentagon planners all know this in varying degrees as it relates to their imperatives and
prerogatives.
However, the mass public and most political leaders are utterly unaware, or in the case of
the latter, have no incentive to know or to share with the public what they know because they
will not be able to raise a nickel thereafter for reelection if they do share.
He told me that he and his colleagues had conducted a similar analysis, in this case of
the UK's energy use and greenhouse gas emissions, "and we find a similar pattern". One of his
papers reveals that while the UK's carbon dioxide emissions officially fell by 194m tonnes between
1990 and 2012, this apparent reduction is more than cancelled out by the CO2 we commission through
buying stuff from abroad. This rose by 280m tonnes in the same period.
GDP is about as decoupled from energy about as much as a dog's tail is decoupled from his ass.
I'm with Ron on this one. If for example GDP units are produced at a ratio of 1:1 for every unit
of energy consumed then a graph representing this trend could perhaps have 2 superimposed lines.
If efficiency gains then begin to create 2 units of GDP for every unit of energy consumed then
the 2 lines on the graph will diverge. There is no decoupling.
Only a divergence due to more units
of GDP produced per unit of energy consumed. When somebody can create units of GDP and consume
no energy at all then we will have decoupling. Coupling and decoupling are all or none terms/states
of being. You're either coupled or your decoupled. Any arguments to the contrary are pedantic
and uninformed.
Look up the meaning of decouple it is reduce or eliminate the effect of one part of
a circuit on another. In this context the appropriate meaning is reduce.
Doesn't really matter, nobody thinks that energy inputs can be eliminated, that would be absurd.
The problem is solved by looking at World output and World primary energy use.
Energy intensity for the World has improved, though during the Chinese rapid expansion from
2000-2010, the progress stopped for a decade as energy was not used very efficiently in China
over that period, since 2010 the progress has continued. Energy intensity is energy per unit of
GDP produced.
Chart below for 1965 to 2014 using World Bank(from FRED), UN, and BP data.
Left vertical axis is in metric tons of oil equivalent (toe) per millions of 2005$ of real
GDP (M2005$).
That graph shows several things mixed that have co-evolved independently, so not
many conclusions can be extracted.
-It reflects improvements in energy usage, meaning we are able to extract more economic yield
per unit of energy. This is the only real efficiency improvement.
-It reflects increase in debt, that is reflected in GDP but does not use energy. If I borrow
money GDP increases yet no energy is used.
-It reflects increase in tertiary economy at the expense of primary and secondary economies.
We pay more for services and less for resources and goods.
We don't know the contribution of each to that graph (at least I don't), but given the magnitudes
involved I would guess that the real efficiency improvement is small. This is supported by how
the graph reacts to recessions (not the Chinese expansion as you claim), indicating that the main
factor is economic, not energetic.
Now we know that debt has a limit, and once debt saturation is reached the economy, and specially
the tertiary sector would be very badly affected. If that happens we might very well see that
graph turn around and energy intensity increase.
GDP only increases if your money is spent on goods or services. It is output
of goods and services. On a World level the debts and liabilities balance, so if I save my money
and lend it to you, I spend less and you spend more. You should review your economics. At a World
level, the debt has no effect, assuming we don't have ant interstellar debts. There was a World
recession from 2000 to 2010? I hadn't heard about that.
Yes services might have increased, if that is what people want to spend their money on, then
the share of services in the economy will increase. I don't have figures on the "non-service economy".
Part of this increase reflects women entering the labor pool in greater numbers, some of the work
cleaning the house or taking care of the garden are now part of GDP when before they were taken
care of by the family. We may not have good data for the World on this effect.
I think I do understand. If I go to the bank and ask for a 200,000 $ mortgage loan,
that money is created from thin air, and when I go and pay for the house, GDP jumps by 200,000
$, so yes, increasing debt increases GDP as soon as the debt money is used. Since no oil was used
to create the money, it counts as a reduction in oil intensity. Of course if I return the money
to the bank the operation is reversed (they do keep the interests), but since on average debt
is always expanding, except during crisis periods, oil intensity is always decreasing, except
during crisis periods. Debt that is used to buy stocks or companies or to extract oil from the
ground is the same.
In most cases the debt will come first if the home is purchased with financing. It
is possible to build a home using savings, in which case there would be no debt.
So the debt is not a requirement for GDP, just creating a new house, car, or other good or
service.
Would GDP be lower if there were no debt, of course!
As long as debt grows at reasonable rates (similar to GDP growth at full employment), when
there is a recession debt will initially grow faster than GDP and then will slow down until GDP
growth catches up and surpasses the debt rate of growth.
I am curious. Do you think what Javier is saying is correct? Energy intensity has decreased
because Debt to GDP ratios have increased? I am pretty sure Javier is not right, but you are very
knowledgeable about economics. Perhaps you can explain it to me, if I am mistaken.
If all GDP was created with no debt (all of it was based on savings and income with no new
borrowing) in year 1. And in year 2 50% of income was borrowed from banks to create the same level
of GDP, would that mean in year 2 we have 150% of the first year because of the debt?
Javier's suggestion about debt is not correct. Really, really not correct. Debt is just
accounting for various kinds of ownership and obligations. If this were the old Soviet Union,
construction would happen based on a central plan, and there would be no debt at all, but there
would still be GDP.
Let's say there two houses on an island, and 2 residents, 1 in each house. One owns both houses,
the other rents from the 1st. Then the renter borrows from the owner, and buys the house he/she
lives in. Their monthly payment was rent, now it's a mortgage payment. The renter is now leveraged.
But, has anything "real" changed? No. Same amount of wealth, same amount of income, with different
kinds of ownership, and different obligations (the renter now has to fix his own roof!).
You should read up on national income accounting. Debt does not really come into
play, and more or less debt says absolutely nothing about the energy intensity of GDP.
The chart I created is primary energy in metric tons of oil equivalent divided by real GDP in
millions of 2005$. Debt plays no role.
Try the following link for a detailed introduction to national income accounting:
I still disagree. It is well known that the increase in debt has a positive effect on
GDP, while the total outstanding debt can become a drag on GDP if too high. It is difficult to
sustain that debt plays no role in GDP in light of the evidence.
For example China has had a phenomenal rate of growth accompanied by the highest rate of debt
growth that the world has seen.
I think it is easy to understand.
Country A finances everything with savings and profits without increasing debt and sees
an increase in GDP of 2%.
Country B finances half of the goods and services with an increase in debt and sees an
increase in GDP of 2%.
Both countries use the same oil so both report the same oil intensity. However country B has
brought half of the wealth used to increase the GDP from the future without bringing any future
oil. That wealth will have to be repaid eventually, detracting from future GDP but at that point
no oil will be recovered.
So in reality country B is reporting half of its real oil intensity. With present wealth it
would have grown GDP by only 1% yet it has spent the same amount of oil than A.
Net effect is that debt reduces oil intensity when it is created and it increases oil intensity
when it is payed. We have not seen that yet because we have not paid any debt yet. Debt is always
increasing.
First we need the GDP level of countries A and B, not just their growth rate. If we only talk
about the incremental increases in GDP and energy use for each country it makes a little more
sense.
So in reality country B is reporting half of its real oil intensity. With present wealth
it would have grown GDP by only 1% yet it has spent the same amount of oil than A.
What you say above is incorrect.
For simplicity I will assume if output grows by 2%, that energy use also grows by 2%, I will further
assume each country has the same GDP, we will say it is $100 million before the 2% growth in your
example.
If country B does not take on any debt and its GDP grows by 1%, then its energy use will also
grow by 1% (not by 2%) as the energy use is proportional to GDP. So the energy intensity would
remain the same. There is no reason for it to change, it depends on technology and the structural
features of the economy (proportion of agriculture, manufacturing, and services).
Another basic fact of economics is that the loans taken out by a business are to take advantage
of a business opportunity and they will tend to lead to higher growth, so your example is flawed.
If countries A and B are of similar size and similar levels of development (twins as it were),
then if country A and country B both shunned any borrowing they will both grow at the same rate,
say 2% and have the same energy intensity (energy use also grows by 2%). Let's now assume both
countries are the same except that country A's culture is such that they think debt is bad, but
country B does not have the same aversion to debt.
Country B borrows at 2% interest to take advantage of an investment opportunity which will have
a rate of return of 4%, so country B grows faster than country A at 3% and its energy use also
grows at 3% (energy intensity remains the same). The extra income earned is used to pay back the
debt and the individual businesses come out ahead earning a net profit of 2% after paying back
the interest. This is how rational businesses operate, they borrow money to make money.
I also have lots of problems with your example, so let's take a step back to look at
the big picture.
That an increase on debt increases GDP is not in doubt. It is not only supported by evidence,
but the basis for an entire economic theory that supports fighting recessions with debt-based
stimulus.
So the question is if an increase in debt increases also GDP without oil consumption as to
reduce oil-intensity. The answer is a resounding yes. Financial services are proportional to debt
increase. Net interest expenses in the financial sector are seen as production and value added
and are added to GDP. Any service charged by financial companies also increases GDP, and none
of this economic activities uses oil, and very little energy.
I believe that a significant part of oil intensity reduction has come from the financialization
of the economy linked to debt-increase, and therefore oil intensity is a fake measure of oil decoupling.
If you look at energy-intensity you see the same phenomenon as with oil. It seems that we are
decoupling from energy because we are moving towards a fake economy based on financial instruments.
Finanzialization also appears linked to raising inequality as it effect is to increase the wealth
only of owners of financial instruments.
I do not doubt that some oil and energy efficiency is real, after all it is a process that
has been going on forever since the first oven was built to cook. But I seriously doubt that it
is a process significant enough to solve an energy deficit problem which is what peak oil is going
to bring. And to me oil intensity is a fake measure of increases in oil efficiency, that I do
not doubt are real but much overstated.
Gail Tverberg has a lot more to say about decoupling GDP growth from energy growth in her article
at TOD for anybody interested in the matter:
Yes the financial sector has increased to a small degree from 4% of GDP to 8% based
on the chart you posted (which is only for the United States rather than the World).
This has probably increased to some degree (more or less than the US is unknown) at the World
level as well. This might explain a very small slice of the decrease in energy intensity, but
I doubt it accounts for most of the change.
I agree with you that changes in the structure of the World economy (higher proportion of services)
has probably decreased energy intensity, but I doubt that accounts for all of the change. The
bottom line is that the World economic system is becoming more service oriented with services
accounting for a larger share of GDP. At some point, services may reach some maximum level, in
percentage terms, beyond which they cannot go. I don't know where that level is, debt levels will
also reach some maximum level (in percentage terms) beyond which they cannot rise (maybe total
debt of 300% to 350% of GDP at a World level as a potential maximum).
When those points are reached growth may be limited by how much more efficiently we can use
energy and how quickly we can ramp up alternative energy as fossil fuel output declines. There
is much that is unknown about the future.
Note that you keep talking about oil, the chart shows primary energy (all forms of
energy used by the economic system.)
Can you explain why country B in your example uses the same amount of energy whether it grows
at 1% or 2%. One would expect that the energy use would be proportional to GDP, as that is what
the World data shows.
That is not what I said or meant. Country B by increasing GDP 1% through an increase
in debt is in essence bringing GDP from the future to the present. That borrowed GDP is using
present energy.
The financial sector has increased from 2% to 8%, a 4x increase. This is not small peanuts.
Specially considering that only a minor part of the financial transactions are considered towards
GDP. Probably only Luxembourg and perhaps Switzerland and other banking paradises have a bigger
share.
So in reality country B is reporting half of its real oil intensity. With present wealth
it would have grown GDP by only 1% yet it has spent the same amount of oil than A.
You say above without the borrowing country B would grow by 1% (why does it grow less than
country A?) but it uses the same amount of oil as country A, why if it grows more slowly?
Look closely at your chart in 1970 (when energy intensity started to decline) it
was 4% and the most recent points on the chart are about 8.4%. I used the data from your chart
(even though it is for the US rather than the World) and did an exponential trend from 1970 to
2010 for 4% to 8% and then extended to 2014 (8.5%) for financial GDP of World economy (probably
not correct, but this is an illustration). Then I found the Energy intensity of the non-financial
sector by assuming the financial sector has zero energy inputs (I expect they are low, this is
an approximation). The Non-Financial Energy intensity is in the chart below.
Finally, Aggregate Demand is increased when there is more debt, but consider the Aggregate
supply of goods produced to meet that demand. Whether the aggregate demand is because of private
or public debt or not does not change the amount of energy needed to produce the supply of goods
and services, it only changes how much demand there will be for those goods and services. I really
cannot make it any simpler than that. Oh one more thing, do you think the energy needed to build
a car (total energy embodied in all processes used to create the car and its components) changes
if someone pays cash for the car vs financing the car?
" This article explains how the majority of money in the modern economy is created by commercial
banks making loans.
Money creation in practice differs from some popular misconceptions - banks do not act simply
as intermediaries, lending out deposits that savers place with them, and nor do they 'multiply
up' central bank money to create new loans and deposits."
Yes that is correct. The banks create money by lending and borrowers destroy money
as they pay back their loans. The money supply is controlled by the Central Bank buying and selling
bonds.
The debt is only a problem if it grows too quickly. If the rate of debt growth slows or the
rate of GDP growth increases there will not be a problem. There are differing views on how much
debt is too much.
Yes I did. Under normal circumstances the supply of money is primarily influenced by
the interest rate that is paid by commercial banks for money borrowed from the central bank. When
the economy is in a severe recession and this interest rate falls to the "effective lower bound"
(about 0.5%), the central bank loses its ability to increase the supply of money through lower
interest rates.
Under these circumstances the central bank will buy assets (government bonds) to increase the
money supply, it does not sell assets to reduce the money supply, it simply raises the interest
rate it charges the commercial banks.
Thanks for that link, it is a nice review of how central banks influence the supply
of money by setting the interest rate which banks must pay on money borrowed from the central
bank, which feeds through to interest rates throughout the economy and affects saving and borrowing
through market interest rates set by banks.
I would encourage Javier to read that link as it addresses many misconceptions about money.
You are comparing apples to oranges. GDP is determined using a price, or market, theory of value. So you are comparing a value determined using a market theory of value to a value determined
using an intrinsic theory of value - the toe of energy.
If you want to compare apples to apples, then you have to compare GDP to the market value of
the energy used.
If we are concerned the energy constraints will limit real GDP, then the amount of
energy consumed per unit of GDP produced is very relevant in my view.
It is not a comparison, it is a measure of energy intensity and how it has changed over time.
See
Well again, Dennis, a valid comparison is one which compares dollars and cents to dollars and
cents, not dollars and cents to toe.
There was a time (1970 to 2010) when the EIA published
the total amount spent in the United States on energy. I have plotted the ratio of total spent
on energy to total nominal GDP for those years. This is a true measure of "energy intensity,"
as it compares apples to apples, and does not omit the price of energy as your graph does.
I have added YOY growth in real GDP (calculated using constant 2009 dollars).
I don't want to draw too many conclusions from the graph, but it paints a far bleaker picture
than your graph does. When energy intensity goes over .08 - as it did in 1974 and 2008 - then
the economy began having convulsions.
The period from 1983 to 2006 is what is known as "the Great Moderation." It is also a period
of low and generally declining energy intensity. When energy intensity began increasing again,
as it did in 1999, surpassing .08 in 2006, then this marked the end of the Great Moderation. Is
this mere coincidence?
Botton line: In my opinion not only is the quantity of energy (measured in toe) important to
the performance of the economy, but the price of that energy is also important.
Using your graph, which makes no allowance for the price of energy, it is easy to see how you
have come to believe that the economy is decoupling from energy.
It is not a comparison of money spent, energy intensity is defined as energy
consumed per unit of output (measured in dollars) as there are many different goods and services
and their monetary value is measured in constant dollars.
The difficulty with using price is that there are many different forms of energy (oil, coal,
natural gas, nuclear, hydro, solar, wind, geothermal, and biofuels) which are included in the
"primary energy" category. Note that your chart shows only one country not the world. I would
present a chart for the World if I had it, I am using the data I have for primary energy divided
by real GDP. I think it is useful because it is energy contraints we are concerned about, currently
some forms of energy (fossil fuels especially) have very low prices so in monetary terms money
spent on Energy divided by real GDP would be quite low.
Energy prices are quite volatile so I like the Energy intensity measure better as it shows
energy needed to produce a unit of GDP, which has in fact declined since 1970 by about 30%(or
an average annual decrease of about 0.8% per year).
I suppose price doesn't matter as long as one can get somebody else to pick up
the tab.
For instance, we can compare a new $40,000 Chevy Bolt ev to a new $20,000 Honda HRV. There's
no way the Bolt can compete on price. But if you can get somebody else to pick up the tab for
the Bolt? Well then, no sweat!
As part of its COP21 coverage, CBS did a puff piece on their Evening News last night about
how EVs are sweeping Norway.
They interviewed one fellow who said he "had done the math" and will be able to drive his new
EV "for free."
So I did a little bit more digging, and sure 'nuf, it looks like he's right.
According to the Wall Street Journal, Norway currently has 54,000 EVs on the road. Last
year their owners received $540,000 in various forms of rebates, tax breaks and other perks from
the Norwegian state. That's a cool $10,000 per car per year. So at that clip, it would only take
4 years to recover the cost of a $40,000 EV. And then after that one can enjoy almost free driving,
all on the government's tab.
But it looks like there's trouble in paradise. The WSJ says the government give-a-ways are
set to end. The day of reckoning is still up in the air, but the latest date for phasing out the
government largess is 2020. So the Norwegian government is taking the punch bowl away. The EV
crowd, of course, isn't taking this horrible injustice lying down:
Christina Bu, secretary-general of the lobbying group Norwegian Electric Vehicle Association,
said the 25,000-member association has been stalking political parties and government officials
to ensure the main incentives remain in place, at least until 2020.
"If you cut all the incentives overnight, sales will plummet," she said.
Weaning buyers from such purchase incentives could add new headwinds to sales of vehicles
already undercut by cheap fuel prices in some markets. In the U.S., the state of Georgia halted
its $5,000 tax credit on July 1. Electric cars were about 2% of purchases in the state in 2014,
estimates Washington-based think tank Keybridge Research LLC. It forecasts a 90% decline, or 8,700
fewer sales annually, as a result of the loss.
Do you have the price of primary energy from 1965 to 2014? I would be happy to do
the chart you would like, but I don't know the appropriate price of energy, which has many different
forms and prices throughout the World.
I agree price matters, as does the amount of energy available to purchase (which is what is
in my chart).
The original study in question was asking about whether an economy can grow without increasing
it's inputs of oil, steel, etc.*
That's a very different question than whether an economy will be hurt by a sudden increase
in the price of a key commodity, like oil. If the price of oil spikes, that can create a shock
for the economy (e.g., people wait to see what happens with prices before they buy their next
vehicle, and that delay causes a recession), but an increase in prices doesn't mean energy consumption
has gone up.
-----------------
* (it can, of course, but that's separate issue from whether our societies have chosen
to do so).
I am far from convinced that GDP growth is a good way of measuring progress in a society. Let's
take an example from the UK economy. (btw I am not worried about the genders here, I would happily
be a house husband if my wife's earning potential was close to mine).
Today, nearly 70% of women of working age work. Families need both incomes to meet a reasonable
standard of living. As a result, a large majority of UK children grow up in families with both
parents working. Many parents end up sending young children to child minders and crèches so that
they can work. This employs a lot of people, mostly women. More wealthy families then employ house
cleaners and gardeners and handymen etc. to clean, garden and repair their homes that they don't
have time to do themselves. Poorer people do without. This employs a lot more people. All the
working women and the people employed by the working women pay taxes which means that people end
up working more hours to afford to pay someone else to do these jobs than it would take to do
the jobs themselves. Unless your own rate of pay is significantly higher than the people you pay
to do the jobs, you would be financially better off doing it yourself. The government and the
economists are delighted because tax take and GDP rise. All these extra people in useful employment
driving around from low skilled job to to low skilled job, consuming extra resources, especially
fossil fuels, when they would be a lot less stressed, more free time and financially better off,
just doing all these activities for themselves.
It is a major mistake to professionalise low skilled domestic work. All it does is free up
time for the rich and increases government tax take. Society as a whole is worse off.
I agree GDP is by no means a perfect measure, just a measure that is available at
the World level. There are other measures such as the social progress index, but this is not available
at the World level. There is also the United Nations Human Development Index(HDI), but again these
measures are not published at the World level (or I couldn't find it). Actually I found some World
data for the HDI from 1980 to 2013. The measure is not perfect see link below for data:
Human Development Index (HDI): A composite index measuring average achievement in three
basic dimensions of human development-a long and healthy life, knowledge and a decent standard
of living. See Technical note 1 (http://hdr.undp.org/en)
for details on how the HDI is calculated.
Chart below with World Primary energy (ktoe) divided by World HDI from 1980 to 2013. Based
on the HDI, more energy is needed to improve well being and GDP is not a good measure of human
welfare.
There is also an index for HDI that takes account of inequality, but the index (called IHDI)
is only available from 2010 to 2013.
"... Oh, and by the way, it was also this same so-called "smart crowd" who also touted this very monetary policy would bolster GDP prints far higher and consistent than they are now. And let's not forget – 1.5% GDP is now formulated with "double seasonally adjusted accounting." i.e., If the print isn't what you want or need; feel free to fudge the inputs as high or, low as needed without causing any obvious unwanted attention or, outright laughter. ..."
"... Gordon Gekko: The richest one percent of this country owns half our countrys wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. Its bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine, upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out there wondering how the hell we did it. Now youre not naive enough to think were living in a democracy, are you buddy? ..."
"... The way the fragmented market is set up there is no need for fundamentals, or anything really for it to go up or down. Price movement is no longer dependant on the true value of the underlying, but value is assigned to the underlying by the amount of market pieces or liquidity participants it attracts at any point in time. ..."
"... I was thinking about it today and it would be possible to have completely imaginary markets (no underlyings) that rely on the best algo to win, Darwinism for quantitation. I guess it would be like the Kentuky derby for computers, may the biggest and fastest server win. You could dump money into it/invest by betting on your favorite algo. In my mind the whole thing is pretty complicated, but thats the gist of it. Anyway.... ..."
The now immortal line spoken by Clint Eastwood as "Dirty Harry" (1971 Warner Bros.) has never fit
as a descriptor these financial markets more so than it does today. For if you believe you're
investing as opposed to gambling? These markets are now poised to show everyone the difference.
From an economic standpoint; not only has the current October surge in market prices been an absolute
absurdity. Rather, just look to where the market as a whole has propelled itself right back to: within
spitting distance of taking out the never before seen in the history of mankind highs. And why shouldn't
it be up here? After all, the economy is absolutely booming right? Right?
So one has to wonder exactly how does an economy in which its latest GDP report prints a blazing
1.5% warrant such a valuation? I know, trick question – it doesn't. However, if one tuned into many
(if not all) of the current financial media outlets this question or, reasoning was never addressed
in any shape manner or, form.
As a matter of fact, there was praise by many of the next in rotation economists for how it was
derived at in the first place, citing the "inventory" figures as a good news catalyst. Only an economist
can find "good news" in a GDP print so pathetic it continues to warrant a continuation of extreme
monetary policy by this very group.
Oh, and by the way, it was also this same so-called "smart crowd" who also touted this very
monetary policy would bolster GDP prints far higher and consistent than they are now. And let's not
forget – 1.5% GDP is now formulated with "double seasonally adjusted accounting." i.e., If the print
isn't what you want or need; feel free to fudge the inputs as high or, low as needed without causing
any obvious unwanted attention or, outright laughter.
What does it say when accounting standards have evolved into a discipline more suited for a massage
parlor than anything resembling a house of academic standards – and 1.5% was the best print available?
What one should infer from that data point alone is well worth contemplating by anyone truly serious
about business or, their wealth. For that little number speaks volumes if one truly cares to dig
deeper.
Looking at the markets "its hard to argue with price" is the old saw. And that price is, as iterated
earlier, extremely high.
That's just fantastic if you're an "investor" with the tendencies of a river boat gambler.
However, if you're someone trying to distinguish the subtleties of when to invest precious resource
capital into cap-ex projects for the prospects of future growth, or whether or not to expend that
capital in hedging strategies to help smooth out input costs – you're out-a-luck. You have just
as good of a chance in flipping a coin for your macro business decisions. For hedging is now "What
Fed. official will say what today?" Heaven help you if it's the opposite of what they said the previous
day. Like the title implied, "Do you feel lucky?" doesn't seem that out of line.
Boris Alatovkrap
Ignore "invisible hand", but eventually is b*tch-slap those that defy.
Escrava Isaura
Invisible Hand?
How about the rabbit hand.
Gordon Gekko: The richest one percent of this country owns half our country's wealth,
five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance,
interest on interest accumulating to widows and idiot sons and what I do, stock and real estate
speculation. It's bullshit. You got ninety percent of the American public out there with little
or no net worth. I create nothing. I own. We make the rules, pal. The news, war, peace, famine,
upheaval, the price per paper clip. We pick that rabbit out of the hat while everybody sits out
there wondering how the hell we did it. Now you're not naive enough to think we're living in a
democracy, are you buddy?
antonina2
The way the fragmented market is set up there is no need for fundamentals, or anything
really for it to go up or down. Price movement is no longer dependant on the true value of the
underlying, but value is assigned to the underlying by the amount of market pieces or liquidity
participants it attracts at any point in time. So, you could say the market or price action
has been more or less decoupled from the true state of its underlying. Supply and demand due to
fundamentals was true before hft and multiple exchanges, but can now be skewed in any direction
for any length of time due to all the new technology and types of order flow that have been introduced.
As long as people are getting paid to provide liquidity and other people are there to pay for
taking liquidity away you can have a market that reaches the moon and beyond while the world is
in a deep recession. So, if you think about it, while the pundits will have you believe that the
market is priced at true valuations, it's not your Grandpa's market anymore, that is why the market
can go up on relatively small volume and shitty data. It is a whole new game and beside disastrous
glitches, the only time positive movement is threatened is when the big fish start placing large
sell order blocks.
I was thinking about it today and it would be possible to have completely imaginary markets
(no underlyings) that rely on the best algo to win, Darwinism for quantitation. I guess it would
be like the Kentuky derby for computers, may the biggest and fastest server win. You could dump
money into it/invest by betting on your favorite algo. In my mind the whole thing is pretty complicated,
but that's the gist of it. Anyway....
It is my belief that things have developed in this manner to keep big money in the markets.
So, I guess the question isn't what is up with the markets, but rather why do large holders continue
to hold, my guess would be that they don't have anything else they want/need to do with their
money. They say, who cares if Bob, Jen, Greg, and half of America can't find a decent job, we
are making more money investing in the market (greater shareholder returns) than by helping to
improve the actual economy and investing in more tangible things like people. It's pretty shitty,
but that is how I have come to make sense of the whole thing. I mean yeah, the market should be
about half of what it is now if it followed fundamentals, but it's not and I think that's why.
Basically, in order for there to be the big market crash that everyone constantly talks about,
some pretty big institutions are going to have to fuck up big time and receive no help in getting
out of it. As long as there is enough money out there this fiasco can go on as long as people
see fit. We all say, oh the FED is dumb and they are doing the wrong thing blah blah blah and
while they are destroying the economy they are keeping the TBTF in the clear and being rewarded
handsomely for it, completely aware of their actions. And to the public, they say fuck em and
feed em cake, so just watch, a Republican with a great tax package will be elected in 2016 to
satiate the people for the next four years while they continue to go about their business, increasingly
bad data is reported and retail investors are like wtf is up with the markets?
"... In 1959, noted American
economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term
changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth
of output." ..."
"... In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and
chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known
issues such as the fact that GDP does not capture changes in the quality of the products (think of
mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent
in the home). The commission also cited evidence that GDP growth does not always correlate with increases
in measures of well-being such as health or self-reported happiness, and concluded that growing GDP
can have deleterious effects on the environment. ..."
"... Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures
economic activity or output. Rather, our issue is with the nature of that activity itself. Our question
is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity
of our society. ..."
"... Robert Shiller
of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s
that stock market prices did not always reflect fundamental value, and sometimes big gaps could open
up between the two. ..."
"... And therein lies the difference between a poor society and a prosperous one. It isn't the amount
of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it
is the availability of the things that create well-being-like antibiotics, air conditioning, safe
food, the ability to travel, and even frivolous things like video games. It is the availability of
these "solutions" to human problems-things that make life better on a relative basis-that makes us
prosperous. ..."
"... This is why prosperity in human societies can't be properly understood by just looking at monetary
measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems. ..."
The most basic measure we have of economic growth is gross domestic product. GDP was developed from
the work in the 1930s of the American economist Simon Kuznets and it became the standard way to measure
economic output following the 1944 Bretton Woods conference. But from the beginning, Kuznets and
other economists highlighted that GDP was not a measure of prosperity. In 1959, noted American
economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term
changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth
of output."
In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and
chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known
issues such as the fact that GDP does not capture changes in the quality of the products (think of
mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent
in the home). The commission also cited evidence that GDP growth does not always correlate with increases
in measures of well-being such as health or self-reported happiness, and concluded that growing GDP
can have deleterious effects on the environment. Some countries have experimented with other
metrics to augment GDP, such as Bhutan's "gross national happiness index."
Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures
economic activity or output. Rather, our issue is with the nature of that activity itself. Our question
is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity
of our society.
Since the field's beginnings, economists have been concerned with why one thing has more value than
another, and what conditions lead to greater prosperity-or social welfare, as economists call it.
Adam Smith's famous diamond-water paradox showed that quite often the market price of a thing does
not always reflect intuitive notions of its intrinsic value-diamonds, with little intrinsic value,
are typically far more expensive than water, which is essential for life. This is of course where
markets come into play-in most places, water is more abundant than diamonds, and so the law of supply
and demand determines that water is cheaper.
After lots of debate about the nature of economic value in the nineteenth and early twentieth
centuries, economists considered the issue largely settled by the mid-twentieth century. The great
French economist Gerard Debreu argued in his 1959 Theory of Value that if markets are competitive
and people are rational and have good information, then markets will automatically sort everything
out, ensuring that prices reflect supply and demand and allocate everything in such a way that everyone's
welfare is maximized, and that no one can be made better off without making someone else worse off.
In essence, the market price of something reflects a collective judgment of the value of that thing.
The idea of intrinsic value was always problematic because it was inherently relative and hard to
observe or measure. But market prices are cold hard facts. If market prices provide a collective
societal judgment of value and allocate goods to their most efficient and welfare-maximizing uses,
then we no longer have to worry about squishy ideas like intrinsic value; we just need to look at
the price of something to know its value.
Debreu was apolitical about his theory-in fact, he saw it as an exercise in abstract mathematics
and repeatedly warned about over-interpreting its applicability to real-world economies. However,
his work, as well as related work in that era by figures such as Kenneth Arrow and Paul Samuelson,
laid the foundations for economists such as Milton Friedman and Robert Lucas, who provided a devastating
critique of Keynesianism in the 1960s and '70s, and recent Nobel laureate Eugene Fama, who pioneered
the theory of efficient markets in finance in the 1970s and '80s. According to the neoclassical theory
that emerged from this era, if markets are efficient and thus "welfare-maximizing," then it follows
that we should minimize any distortions that move society away from this optimal state, whether it
is companies engaging in monopolistic behavior, unions interfering with labor markets, or governments
creating distortions through taxes and regulation.
These ideas became the intellectual touchstone of a resurgent conservative movement in the 1980s
and led to a wave of financial market deregulation that continued through the 1990s up until the
crash of 2008. Under this logic, if financial markets are the most competitive and efficient markets
in the world, then they should be minimally regulated. And innovations like complex derivatives must
be valuable, not just to the bankers earning big fees from creating them, but to those buying them
and to society as a whole. Any interference will reduce the efficiency of the market and reduce the
welfare of society. Likewise the enormous pay packets of the hedge-fund managers trading those derivatives
must reflect the value they are adding to society - they are making the market more efficient. In
efficient markets, if someone is willing to pay for something, it must be valuable. Price and value
are effectively the same thing.
Even before the crash, some economists were beginning to question these ideas. Robert Shiller
of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s
that stock market prices did not always reflect fundamental value, and sometimes big gaps could open
up between the two. Likewise, behavioral economists like Daniel Kahneman began showing that
real people didn't behave in the hyper-rational way that Debreu's theory assumed. Other researchers
in the 1980s and '90s, even Debreu's famous co-author Arrow, began to question the whole notion of
the economy naturally moving to a resting point or "equilibrium" where everyone's welfare is optimized.
An emerging twenty-first century view of the economy is that it is a dynamic, constantly evolving,
highly complex system-more like an ecosystem than a machine. In such a system, markets may be highly
innovative and effective, but they can sometimes be far from efficient. And likewise, people may
be clever, but they can sometimes be far from rational. So if markets are not always efficient and
people are not always rational, then the twentieth century mantra that price equals value may not
be right either. If this is the case, then what do terms like value, wealth, growth, and prosperity
mean?
Prosperity Isn't Money, It's Solutions
In every society, some people are better off than others. Discerning the differences is simple. When
someone has more money than most other people, we call him wealthy. But an important distinction
must be drawn between this kind of relative wealth and the societal wealth that we term "prosperity."
What it takes to make a society prosperous is far more complex than what it takes to make one individual
better off than another.
Most of us intuitively believe that the more money people have in a society, the more prosperous
that society must be. America's average household disposable income in 2010 was $38,001 versus $28,194
for Canada; therefore America is more prosperous than Canada.
But the idea that prosperity is simply "having money" can be easily disproved with a simple thought
experiment. (This thought experiment and other elements of this section are adapted from Eric Beinhocker's
The Origin of Wealth, Harvard Business School Press, 2006.) Imagine you had the $38,001 income of
a typical American but lived in a village among the Yanomami people, an isolated hunter-gatherer
tribe deep in the Brazilian rainforest. You'd easily be the richest Yanomamian (they don't use money
but anthropologists estimate their standard of living at the equivalent of about $90 per year). But
you'd still feel a lot poorer than the average American. Even after you'd fixed up your mud hut,
bought the best clay pots in the village, and eaten the finest Yanomami cuisine, all of your riches
still wouldn't get you antibiotics, air conditioning, or a comfy bed. And yet, even the poorest American
typically has access to these crucial elements of well-being.
And therein lies the difference between a poor society and a prosperous one. It isn't the amount
of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it
is the availability of the things that create well-being-like antibiotics, air conditioning, safe
food, the ability to travel, and even frivolous things like video games. It is the availability of
these "solutions" to human problems-things that make life better on a relative basis-that makes us
prosperous.
This is why prosperity in human societies can't be properly understood by just looking at monetary
measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems.
These solutions run from the prosaic, like a crunchier potato chip, to the profound, like cures for
deadly diseases. Ultimately, the measure of a society's wealth is the range of human problems that
it has found a way to solve and how available it has made those solutions to its citizens. Every
item in the huge retail stores that Americans shop in can be thought of as a solution to a different
kind of problem-how to eat, clothe ourselves, make our homes more comfortable, get around, entertain
ourselves, and so on. The more and better solutions available to us, the more prosperity we have.
The long arc of human progress can be thought of as an accumulation of such solutions, embodied in
the products and services of the economy. The Yanomami economy, typical of our hunter-gatherer ancestors
15,000 years ago, has a variety of products and services measured in the hundreds or thousands at
most. The variety of modern America's economy can be measured in the tens or even hundreds of billions.
Measured in dollars, Americans are more than 500 times richer than the Yanomami. Measured in access
to products and services that provide solutions to human problems, we are hundreds of millions of
times more prosperous.
"When so many think the numbers are manipulated to some nefarious end, it
is no wonder that empirical observations carry so little weight in informing
thought on how the economy works."
For the last 20 years, realistic US inflation rate was probably higher then
official figures considerably. Some estimate it between 4% to 5% a year. Medical
expenses rose probably 200%. Cost of higher education skyrocketed. We can say that
rent alone from 1995 to 1996 rose probably 60% (assuming 3% a year official figure).
Food prices are highly correlated with oil and they rose more (but they do not represent
major expense item in most budgets).
"... Absolute shit one bedroom apartments rent for $800 a month. A decent two
bedroom apartment goes for $1600. A FUCKING APARTMENT. Not in the city of Boston
or suburbs like Cambridge, but 40 miles west. A "three" bedroom 1100 sq ft house
in a crap city like Fitchburg can rent for $1400. ..."
... by now everyone knows that the artificially suppressed, "hedonically-modified"
and seasonally-adjusted inflationary readings is what has permitted the
Fed to not only grow its balance sheet to $4.5 trillion but to keep rates
at 0% for 8 years. Because "how will the economy recover if there is no
broad inflation", the Keynesian brains in the ivory tower scream, demanding
more, more, more easing just to push inflation higher.
There is only one problem with this: it is all a lie - just ask
any average American whose cost of living has soared in the past decade.
Still, with reality diverging so massively from the government's official
data, reality just had to be wrong somehow.
Turns out reality was right all along, as revealed by the latest
"State
of the Nation's Housing" report released by the Center for Housing Studies
at Harvard, which showed that while inflation among most products and services
may indeed be roughly as the Fed and BLS represent it, when it comes to
rent - that most fundamental of staple costs - things have never been worse.
According to the report, for American renters 2013 marked another
year with a record-high number of cost burdened households - those paying
more than 30 percent of income for housing. In the United States, 20.7
million renter households (49.0 percent) were cost burdened in 2013.
It gets worse: a whopping 11.2 million, or more than a quarter of
all renter households, had "severe cost burdens, paying more than half of
income for housing." The median US renter household earned $32,700 in
2013 and spent $900 per month on housing costs. Renter housing costs are
gross rents, which include contract rents and utilities.
... ... ...
And since there is an unprecedented demand for rental units across the US
(as the "owning" alternative has become inaccessible), the median asking rent
not only soared at an annual rate of over 6%, it has never been higher, with
the Census Department recently reporting that the Median US asking just hit
an all time high $803.
... ... ...
What is odd is that according to the BLS, rent inflation is far less: at
just 3% in the most recent print. One wonders what seasonal adjustments American
renters should use to make their monthly paycheck smaller, the way the BLS perceives
it. Still, at 3.6% this is the highest annual rent inflation since 2008.
And herein lies the rub: because it is not so much what the real, honest
inflation growth rate of rent is, it is what the offsetting income growth. Unfortunately,
while the BLS can seasonally adjust rent payments to make them as low as a bunch
of bureaucrats want, the bigger problem is that US household income is not only
not keeping up with rent inflation, it is far below it. In fact, as reported
last week, real income is now back at 1989 levels!
And here is the punchline:
"in the years following 2000, gains in typical monthly rental costs exceeded
the overall inflation rate, while median income among renters fell further
and further behind (Figure 3). As a result, the share of renter households
facing severe cost burdens grew dramatically, reaching a new record high
of 28 percent in 2011 before edging down to 26.5 percent in 2013. Adding
in those with moderate burdens, just under half of all renters were cost
burdened in 2013. These rates are substantially higher than a decade ago
and roughly twice what they were in 1960."
... ... ...
Furthermore, rent inflation isn't going anywhere - in fact, it will only
get worse: "as of 2013, the median rent of a newly constructed unit
of $1,290 was equal to about half the median renter's monthly household income,
underscoring the urgent need for policy makers to consider enhanced levels of
support for rental housing particularly for lowest income households but across
a range of income levels."
Hype Alert
Housing and healthcare are severely under reported on inflation. How
healthcare can triple and not set off flashing red lights on inflation is
unreal.
Never One Roach
I don't know how seniors who relied on SS benefits to survive are living
when their COLA has been 0.01% the past several years despite soaring food,
health costs, utinilites, etc.
AGuy
"I don't know how seniors who relied on SS benefits to survive are
living when their COLA has been 0.01% "
Simple: many still work while collecting SS. Some have part-time jobs (aka
Wallmart) others maintained their full time jobs. If you look at the employment
chart, Employment for those 55 and older has risen considerably. I believe
employment for the 70+ group has also increased.
However, many 65+ have a lower cost of living. (ie no mortgage payments,
no college loans, lower healthcare -on Medicare, etc). They can afford to
take on one part time job to meet ends since they have SS.
Consuelo
"The reason for this is a simple, if dramatic one: the U.S. transformation
from a homeownership society, to one of renters."
All well & good in the context of officialdom's lies and deceit, but
there's just a ~tiny~ bit of clarification needed here...
Home 'ownership' is a misnomer, and just a plain bald-faced Falsehood
in reality. You don't 'own' ~anything~ until that last mortgage payment
is made - assuming you're not a $cash buyer. And even then, try skipping
a property tax payment... And didn't we just find out a few years back,
the real meaning of 'home ownership' to the ball & chain tied schlub paying
(or not) his mortgage...?
WTF_247
Wage growth has lagged most other costs for at least a decade or more.
Inflation and other cost increases are compound functions. The correction
will take care of itself. Healthcare and rent are taking more and more of
peoples $$ You can only stretch it so far - at some point there is no more
money.
Either incomes will rocket up OR housing, including rent, will crash
huge. You cannot get renters to pay for something they have no money for.
No one is going to rent and choose not to eat or to eat ramen noodles permanently.
You cant even get rid of health insurance now or the IRS comes after you
- no matter how much it increases each year (estimated 15-20% increase next
year). You can get 1 roommate, then 2. But most cities limit the number
of renters based upon the number of bedrooms - this only goes so far.
The solution is to stop working or only work a bare minimum - get benefits.
Section 8 housing. EBT. Free healthcare. Welfare benefits.
Something is wrong in the US when a working mother making 29k has a better
standard of living that someone making 69k per year. If anyone thinks this
is not lost on the population as a whole, they would be mistaken. As costs
keep going up it is more lucrative to NOT fight anymore. Let the govt pay
for it.
novictim
Tyler! "Missing Inflation" is not a mistake or a misunderstanding or
an accounting glitch.
Inflation really is low. People have insufficient money.
Do not confuse asset inflation with real inflation. Stock overvaluations
and real estate over-evaluations do not create real inflation because prices
drop when people sell. Assets are self correcting and non-inflationary.
adr
I shouldn't have to worry about affording somewhere to live with the
job I have, yet because of where the job is I have to.
The entire Northeast is fucking insane.
Absolute shit one bedroom apartments rent for $800 a month. A decent
two bedroom apartment goes for $1600. A FUCKING APARTMENT. Not in the city
of Boston or suburbs like Cambridge, but 40 miles west. A "three" bedroom
1100 sq ft house in a crap city like Fitchburg can rent for $1400.
I posted a three bedroom ranch that was renting for $3200 a month a little
while ago. What do millionaires rent shitty 1950s ranch homes in a hick
town?
Then you have property taxes. Up 100% in five years in almost every town
even though assessments are actually down. I saw a home listed with a 2009
value of $364k and property taxes of $2800 a year. The current assessed
value is $289k but taxes are $5200.
"...You're an econ prof, no? In the first year macro I just finished, it was explained that
inflation is a tax on the rentiers class. Thus the power elite hates inflation."
"...The Fed does absolutely nothing to require that the money it creates pays workers to build
anything. Instead the only thing the Fed money does is cause existing asset churn which inflates
asset prices to a bubble as seen by the bubbly stock price indexes globally. Dollars are abundant
and being spent buying old labor in hopes that the value of the decades old labor will be worth more
tomorrow."
pgl still hasn't demonstrated the iron economic law that says that inflation increases must
necessarily be passed along to labor, not stolen by capital.
The precedent of productivity increases stolen by capital over the past 40 years is not
encouraging, but there are economists like Janet Yellen who still disingenuously are that
productivity increases get passed along! And despite the evidence, pgl chooses to believe her!
mulp said...
But printing more money just forces the exiting money to be spent paying workers slower and
slower.
The national economic policy selected by We the People is clearly:
DO NOT PAY WORKERS TO BUILD ANYTHING.
The Fed does absolutely nothing to require that the money it creates pays workers to build
anything.
Instead the only thing the Fed money does is cause existing asset churn which inflates asset
prices to a bubble as seen by the bubbly stock price indexes globally. Dollars are abundant
and being spent buying old labor in hopes that the value of the decades old labor will be
worth more tomorrow.
We the People understand that paying labor to build new assets will crater the prices of all
the inflated asset prices, eg, creating the kind of excess supply we see in fossil fuels which
will cause cratering prices, profits turning to losses, and the asset price bubble popping in
a big way.
The 21st century has proved to me that I was totally wrong to believe in monetary theory based
on the arguments and data of Milton Friedman, and that led me to reexamine the policies of FDR
in the face of a populist Congress.
Insight one: deep crisis is required to motivate We the People.
Insight two: the only way to create a better economy is to pay more workers to work more
Insight three: the only way to pay more workers more to work more is for taxes taking money
from those who have money which is basically everyone in the upper half who will then demand
benefits NOW for all their taxes
Doing the liberal thing to prevent massive poverty in 2008 was the wrong thing. Democrats
should have made demands that Bush and Republicans would totally refuse to agree to, so all
the money market funds experienced runs and 50% of the depository banks got taken over by the
FDIC, and half the businesses in the US stopped paying workers because they could get their
cash in their banks because the banks were taken over by the FDIC. And in 2009, Democrats
should have kept increasing demands and demanding ever higher tax hikes every time Republicans
fought to block Democratic budget bills keeping the economy sinking deeper and deeper making
more and more people poor.
The ideal outcome of 2009 would have been corporate tax rates of 50% on business profits of 5%
ROIC or lower and 90% on all profits in excess of 5% ROIC, but with 100% deduction for all
capital investment excluding buying existing corporations or partnerships. And 90% income tax
rates in excess of twice the median income, excluding buying tax exempt infrastructure
construction bonds or investing in energy efficiency capital assets.
Or a carbon tax that was set to rise every year until tax revenue was zero with all the tax
revenue used to repay Federal debt.
Tax dodging is the biggest incentive to pay workers to build stuff that lasts and that is
productive.
The Fed can't do anything but prevent the required crisis to force the required political
change.
Or cause the crisis that will create change.
The Fed needs to jack up interest rates to, if nothing else, increase the Federal deficit
rapidly by increasing the interest costs.
One of two things would happen: Republicans would win in 2016 and crash the economy by massive
spending cuts driving tens of millions into poverty, homelessness, etc.
Or taxes rates would be greatly increased to reduce the deficit but the high tax rates would
make hiring workers the cheapest way to cut taxes due and get some benefit.
If I were in the Fed I'd be calling for a 1% hike every year (.25% a quarter) for the next
three years.
likbez said...
The USA now reminds me the USSR in a sense that government figures are not using open
verifiable methodology. Some thing that those metrics became yet another "number racket". Some
measures like inflation and GDP are definitely politicized.
That gives an impetus for sites like http://www.shadowstats.com
Those people who operate using pure government statistical figures without questioning their
error range are just another brand of highly paid charlatans. And their papers and articles
should be viewed as exercise in "tail wags the dog"
Actually that can be viewed as another dimension of mathiness.
For example government announced that GDP is 3.7%. And everybody jumps in admiration. And
nobody asks what was GDI released for this period. Suckers...
Peter K. said in reply to likbez...
"The USA now reminds me the USSR in a sense that...
Republicans are dynamic scoring in order to massage the numbers to that their favored policies
look better?
likbez said in reply to Peter K....
My point is the USA now reminds the USSR with its tendency to "beautify" economic data.
Think about all those birth-death adjustments, substitution of U6 with U3 (concepts of
"discouraged workers" and "marginally attached workers"), redefining full employment metric
(which no longer means 40 hours a week employment), hedonic adjustments/substitutes,
"managing" inflation by changing the way it is calculated, price anomalies that bump GDP up,
like tremendously overpriced military hardware, etc.
Please don't throw the baby out with the bathwater
Dan Kervick
"Finally, why the huge fear over a little bit of inflation rather than huge fear over
higher than necessary unemployment?"
It is a good question, and frankly I have trouble believing that people like Fisher actually
*are* worried about a little bit of inflation. Fisher set out his fuller position over a year
ago, and I doubt it has changed much:
He's mainly afraid that the Fed might blow a bubble, and he's afraid that the independence of
the political Fed is being compromised by it's being dragged into service to compensate for
the lack of fiscal and regulatory action by Congress.
I would suggest that, on the second point at least, everyone should get used to the fact that
central bank policy is inevitably a response to politics. That's because central bank policy
is always based on general economic conditions, and general economic conditions are always to
a substantial extent a function of government policy. So central bank policy has to be
responsive to government policy. Tough cookies for all of those believers in an "independent"
central bank. There is no such thing as an autonomous "economy" that is independent of
political choices.
Other not fully acknowledged factors driving the recent debate are equally political. The Fed
is worried that if normalization is delayed, then some time next year the Fed will *have to*
reverse course, one way or another. If that takes place after the parties have chosen their
nominees and the political race is in full gallop, the Fed will be accused of intervening (in
some way, on behalf of someone) in the campaign, and will become a political football. (As far
as I'm concerned that would be great, because the US central banking system needs radical
reform - but the Fed guys wouldn't like it.)
The other thing they are obviously worried about is a recession. If the US experiences a
recession for any reason over the next 18 months, and the Fed is still stuck down close to the
zero bound, then it will not be able to exert a substantial stimulative impact - at least not
without radical new measures like helicopter money. Again, that's something that wouldn't both
me personally, but Independent Fed establishmentarians would freak.
John said...
You're an econ prof, no?
In the first year macro I just finished, it was explained that inflation is a tax on the
rentiers class. Thus the power elite hates inflation.
The professor from Harvard is a total clown. PPP GDP makes more sense than dollar GDP for any
country other than the USA when comparing GDP sizes. PPP normalizes price scales for products
and services of equal value. US produced overpriced military hardware is not worth every cent
compared to cheaper Russian hardware. Nobody who claims the T-14 or even the T-90MS is trash compared
to Abrams tanks can be taken seriously. So it simply does not make sense to use dollars to compare
Russian military and civilian production which grossly understates the *physical* economy. The
one composed of tangible matter and energy and not psychological delusions. Even services can
be properly evaluated in terms of matter and energy so there is such a thing as an objective,
physical economy.
Another way of countering the Harvard economic voodoo is to think what would happen if some
rich Americans decided to buy up all that cheap, 3rd rate GDP of some other country. The prices
would shift overnight and they would lose their ability to buy anywhere near the amount they thought
the could. So pricing the GDP of states other than the US in dollars is beyond ridiculous. But
it serves US propaganda purposes to claim that a 50% ruble devaluation shrank Russia's GDP by
50%.
I do have to ask though, while paging Guy, whether the fact that traders can, on futures and options
exchanges dominated by New York, Chicago, London, Hong Kong etc., multiply the actual physical
economy in terms the amount of "munny" at stake, whether a focus on the "real" – physical – economy
is entirely to the point.
Just as a rough stab at what I mean: this seemingly meaningless false economy has made London
the powerhouse of England's economy… It seems utter bullshit to me but it has "worked" somehow
since Thatcher's age.
My point is, I wouldn't underestimate the staying power of the wholesale financialization of
the economy. What I'd like to really understand is how it's gotten this far and, FWIW, what it
will look like when it comes to an end.
That's going to be absolutely wrenching I suspect. Least of all for its advocates with perfect
irony.
Indeed, money has established economic structures that are meta-stable. Since psychology is one
of the main parameters of the economy (humans make choices based on various notions and delusions
and this translates into physical processes converting matter and energy), money enables the manipulation
of human behaviour including the establishment of perceptions that organize economic activity.
Banksters are quite powerful politically, they manipulate the economy in ways that no politician
can.
Over the last 20+ years we have seen how financial "technologies" have driven western GDP growth
via debt growth. This applies to all levels including the individual consumer who is racking up
large debts to pay for all sorts of consumer junk. The housing market is also grossly distorted
and people are "buying" million dollar homes on family incomes of $70,000. Their mortgages are
nearly all interest and only affordable due to ridiculously low interest rates.
But the racket can't last forever. Growth through cheap credit is a nonsense concept in the
long run. Already the national debts of many NATO states are beyond the ability of those states
to pay them off. Even though they are "only" around 80% of GDP, there is no austerity program
that would preserve the GDP level and the ability to pay. Greece is a nice example of what happens
when the confidence in the system breaks. Greece was actually quite normal and attempts to paint
it as some sort of special basket case are revisionism. The west is headed for the brick wall
of reality. I am afraid that the elites realize this and are engineering WWIII to extricate themselves.
Interesting divergence between "Blue Chip" consensus and the GDPNow measure from the Atlanta Fed:
GDPNow:
The growth rate of real gross domestic product (GDP) is a key indicator of economic activity,
but the official estimate is released with a delay. Our new GDPNow forecasting model provides
a "nowcast" of the official estimate prior to its release. Recent forecasts for the GDPNow
model are
available here. More extensive numerical details-including underlying source data, forecasts,
and model parameters-are
available as a separate spreadsheet.
Latest forecast - September 3, 2015
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third
quarter of 2015 is 1.5 percent on September 3, up from 1.3 percent on September 1. ...
... As more monthly source data becomes available, the GDPNow forecast for a particular quarter
evolves and generally becomes more accurate. That said, the forecasting error can still be
substantial just prior to the "advance" GDP estimate release. It is important to emphasize
that the Atlanta Fed GDPNow forecast is a model projection not subject to judgmental adjustments.
It is not an official forecast of the Federal Reserve Bank of Atlanta, its president, the Federal
Reserve System, or the FOMC.
am said...
How do the Atlanta numbers compare to the actual BEA released numbers, e.g. April-June 2015.
I tried to find comparisons on their site but couldn't see any.
likbez said in reply to am...
How BEA released numbers for April-June 2015 compare with reality might be a better question
Matt Young said...
http://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm
--------
And this is where the growth is coming from. Look at the variance in growth rates by region
over 4 years. Twice the growth rate westt of the rockies then east. There is no Keynesian model
or hat trick which will reverse the trend. This is saddleback mountain, no aggregate spending
program defeats the bifurcated distribution because it has no way to service the low growth
economies at the expense of the high growth.
pgl said...
The Blue Chippers seem to be optimistic! AM raises a good question that should be done more
broadly. Do they publish a comparison of the track record for all these forecasters?
likbez said in reply to pgl...
"Do they publish a comparison of the track record for all these forecasters?"
Any attempt
to predict fuzzy number by definition is fuzzy. We need to talk about parameters of certain distributions
which are represented by single numbers in BEA report.
What I would like to see is an analysis of why GDI reading was recently so much lower then
GDP reading.
"...GDI is identical to GDP in theory. Money used to purchase goods and services becomes
someone's income in one way or another. But GDI differs in practice due to the way the national income
and product accounts are constructed."
"...The first new measure, called gross domestic output (GDO), is now published by the Bureau
of Economic Analysis. It's simply the average of GDP and GDI. Adjusted for inflation, here is how
it compares to GDP:"
"..."the simple average -- what we have called GDO -- of the initial estimates historically has
been a better gauge of the latest and presumably most accurate estimates of GDP growth than either
GDP or GDI individually as well as a more stable predictor of future economic growth. Moreover, using
GDO helps at least partially to resolve some recent economic anomalies. As a result, GDO offers a
valuable new source of information for households, businesses, researchers, and policymakers seeking
to understand economic issues in real time.""
"...However, while both GDO and GDPplus improve on using GDP or GDI alone, neither alternative
overcomes all the problems with GDP and GDI, particularly the lag of several months before data on
GDP and GDI first become available. In addition, it can be as long as several years before all the
important data revisions are completed, and forecasts beyond a quarter or two ahead are unreliable"
How well is the U.S. economy doing, and where might it be heading in the future?
To answer these
questions, we need a way to assess the total amount of goods and services the economy is producing
in a given time period. One measure of this quantity, gross domestic product (GDP) is well known.
It estimates the total value of new goods and services produced in the U.S. over a given period,
usually a quarter or a year. (Also, the goods must pass through organized markets, so black market
activity and goods produced in homes aren't counted.)
However, there's another way to arrive at this estimate of total economic activity: gross domestic
income (GDI).
GDI is identical to GDP in theory. Money used to purchase goods and services becomes someone's
income in one way or another. But GDI differs in practice due to the way the national income and
product accounts are constructed.
Thus, because neither measure is perfect on its own, and the errors in GDP and GDI are largely
independent, it should be possible to combine the two measures to improve our estimate of how
well the economy is performing in a given time period. That's what two recent strands of research
are attempting to do.
The first new measure, called gross domestic output (GDO), is now published by the Bureau
of Economic Analysis. It's simply the average of GDP and GDI. Adjusted for inflation, here is
how it compares to GDP:
The graph is from a recent
Issue Brief published by the Council of Economic Advisors. It discusses this new measure and
notes that
"the simple average -- what we have called GDO -- of the initial estimates
historically has been a better gauge of the latest and presumably most accurate estimates of
GDP growth than either GDP or GDI individually as well as a more stable predictor of future
economic growth. Moreover, using GDO helps at least partially to resolve some recent economic
anomalies. As a result, GDO offers a valuable new source of information for households, businesses,
researchers, and policymakers seeking to understand economic issues in real time."
The second new measure, called GDPplus, is an optimally weighted combination of GDP and GDI,
with weights that are allowed to evolve over time.
This measure, which is
available from the Philadelphia Fed, has
some technical advantages over the simple average discussed above. However, while both
GDO and GDPplus improve on using GDP or GDI alone, neither alternative overcomes all the problems
with GDP and GDI, particularly the lag of several months before data on GDP and GDI first become
available. In addition, it can be as long as several years before all the important data revisions
are completed, and forecasts beyond a quarter or two ahead are unreliable. However, GDPplus,
unlike GDO, can be calculated even if only one of GDP or GDI is available.
Thus, the best approach to characterizing how well the economy is performing at a moment in
time, and how well it's likely to do in the future, is to use a measure such as GDPplus in combination
with other windows into the state of the economy such as the unemployment rate, industrial production,
consumption, investment and so on.
"...Measuring value-added is key but when the global value chain is within a multinational
- measuring value-added depends on intercompany prices. How do we know they are set at arm's length
amounts? We don't. "
Call me a nerd but the latest from Tim Taylor is something I need to read more carefully. But
let me pull this sentence:
"In studies of global value chains, a standard measure is to calculate
what proportion of the value-added from a country's exports are actually from imported inputs."
Measuring value-added is key but when the global value chain is within a multinational
- measuring value-added depends on intercompany prices. How do we know they are set at arm's
length amounts? We don't.
The federal government today released two very different estimates of the U.S. economy's
growth rate in the second quarter. The one that got
all the attention was the robust 3.7 percent annual rate of increase in gross domestic
product. Not many people noticed that gross domestic income increased at an annual rate of just
0.6 percent.
That's a big discrepancy for two numbers that should theoretically be the same, since they're
two ways of measuring the same thing: the size of the economy. If you believe the GDP number,
you're happy. If you believe the GDI number, you're thinking the U.S. is skating close to a
recession.
The Bureau of Economic Analysis always gives more prominence to the GDP number in its
quarterly press release. But today, for the second time in a quarterly report, it released an
average of GDP and GDI growth rates. That average came in at 2.1 percent after rounding-and in
this case, that's probably closer to the truth than either number alone.
There is no name for the new hybrid data series, which was described
rather prosaically as "the average of real GDP and real GDI." President Obama's Council of
Economic Advisers nicknamed it gross domestic output in a July
issue brief. Here's what it wrote:
GDP tracks all expenditures on final goods and services produced in the United States,
whereas GDI tracks all income received by those who produced that output. Conceptually the two
should be equal because every dollar spent on a good or service (in GDP) must flow as income
to a household, a firm, or the government (and therefore must show up in GDI). However, the
two numbers differ in practice because of measurement error.
Here's one key takeaway from the Commerce Department's report on gross domestic product
Thursday in Washington: Gross domestic income climbed at a 0.6 percent annualized rate, well
short of the rebound in growth.
* The increase in GDI last quarter followed a 0.4 percent advance in the first three months of
the year, marking the weakest back-to-back gains since mid-2012
* The 3.1 percentage-point gap between GDI and GDP, which climbed at a 3.7 percent rate, was the
largest in favor of GDP since the third quarter of 2007
* While GDI and GDP should theoretically match over the long run, they can diverge from
quarter to quarter. There has been a debate about which is more accurate, with some Federal
Reserve researchers finding incomes give better signals
"...Economists are post-industrial shamans whose witch doctor modeling impedes macro economic
understanding. The precision of models is ersatz, more or less inversely proportional to its real
world relevance. The delusion of being a scientist is critical to their professional self-respect.
"
"...You're all pants-wetting terrified that the American people are tired of do-nothing neoliberal
government, and will figure out that with a more assertive and economically engaged central government
dynamic growth and social transformation are possible, and that the stagnation, predatory exploitation,
cruel subjugation and social destruction wrought 40 years of neoliberalism was a horrible and completely
avoidable mistake."
- in the hope of preserving there institutional economic significance,
- out of a sense of loyalty to the Fed's history of financial influence using interest
rates,
- because using rates to influence economic events increases their professional comfort,
- and because their economic grad school training was to fear wage push inflation above
all else (they seem to believe that if inflation exceeds 2% it is a harbinger of hyper inflation).
Economists are post-industrial shamans whose witch doctor modeling impedes macro economic
understanding. The precision of models is ersatz, more or less inversely proportional to its
real world relevance. The delusion of being a scientist is critical to their professional self-respect.
Dan Kervick -> lower middle class...
A 3.7% quarter with several hands tied behind our backs by a don-nothing government. Think
about what we could do if we were really trying.
pgl -> Dan Kervick...
YEA! Let's build that Mexican wall. Let's wage war on China. Lord - the stupidity here is
multiplying!
Dan Kervick -> pgl...
This is an area in which you seem to be persistently incapable of avoiding lies.
You know very well that are a large number of ambitious long-term projects the US could
do that are non-military, have nothing to do with immigration and could boost output tremendously.
You're becoming part of the LPTS crew: "liberal pundits terrified of socialism."
That's why Brad DeLong has an embargo on any talk about Bernie Sanders and his ideas.
That's why Paul Krugman is also avoiding Sanders like the plague and using daily red meet
partisan servings to keep Democrats' attention riveted on the foibles of the Republicans.
That's why Brendan Nyhan has yet another column warning us all about the dangers of "Green
Lanternism".
You're all pants-wetting terrified that the American people are tired of do-nothing
neoliberal government, and will figure out that with a more assertive and economically engaged
central government dynamic growth and social transformation are possible, and that the stagnation,
predatory exploitation, cruel subjugation and social destruction wrought 40 years of neoliberalism
was a horrible and completely avoidable mistake.
40% of this country has household income of under $40,000 per year. If we remove the plutocratic
capitalist stranglehold on this economy, use government to more efficiently distribute and
invest our national wealth, and demote private enterprise to its proper subordinate place,
we could double that rapidly and drive a wave of high-growth social transformation with all
of the liberated economic energy.
This is going to happen. Take your pick: we're either going to get the somewhat fascistic
and racist Trump version on strong government or democratic socialist version. The Ivy League
twits hanging on for dear life to their established networks, revolving doors, tit-for-tatting,
sinecures and don't-rock-the-boat regime of stagnant managerialism are going to butts handed
to them by history.
pgl -> Dan Kervick...
Blah, blah, blah. I guess we could employ more economists at the BEA to do what they are
already doing at Census.
Dan Kervick -> pgl...
The Census doesn't and can't combine income distribution numbers with growth numbers on
a monthly and quarterly basis. The BEA could collect this data, but doesn't, because it is
part of their mission to pretend class conflict doesn't exist.
The top quintile in the US pulls down about 50% percent of the income. That means we could
get 3.7% annualized growth if their income grew by 6% while everybody else's income grew by
less than 1/2 a percent.
Is that what's happening? Inquiring minds want to know. It seems like a natural mission
for the BEA to track this. But they don't.
pgl -> Dan Kervick...
You have no clue what these people do or the task you are whining about. With all you incessant
babbling and whining - your keyboard is likely ready to just rot away.
Me? I'm headed down to the Starbucks to whine that they don't make tacos. Duh.
Dan Kervick -> pgl...
I know what they do, and I know what they don't do. Their mission should be expanded.
likbez -> Dan Kervick...
Dan,
I think you are mistaken about "a natural mission for the BEA to track this". Our elected
officials and Wall Street executives all have a vested interest in keeping the perception of
a robust economy alive. The economy growth numbers and the employment data announced are critical
to this perception, but a thorough analysis of the data suggests something quite different
that what we are told.
Statistics now became more and more "number racket" performed, like in the USSR, in the
interest of the powers that be.
Think about "substitution" games in measuring consumer inflation.
Think about "Birth/Death adjustment" in employment data.
Think about tricks they play with GDP measurement.
The net result of this tricks is that the error margin of government statistics is pretty
high. And nobody in economic profession is taking into account those error margins.
So in no way we can accept this 3.7% annualized growth figure. This is a fuzzy number, a
distribution from probably 2.7% to 3.7%. Only upper bound is reported. And if you delve into
the methodology deeper this range might be even wider. What is actually the assumption of quarterly
inflation in the USA used in calculation of this number?
Which is another factor that makes neoliberal economics a pseudoscience, a branch of Lysenkoism.
JohnH -> Dan Kervick...
This is very revealing...nobody provides regular statistics on distribution. That lack of
interest makes it blatantly obvious that policy makers only care about the top number--GDP--and
are totally uninterested in knowing whether most Americans are prospering or not.
There is one source that updates Census data on a monthly basis. It shows that real median
household income is still 3.8% below where it was in 2008 or in 2001. In fact, it's back where
it was in the 1980s.
Meanwhile, Saez and Montecino have pointed out that the 1% got 58% of the gains from the
'recovery,' while the 99% got 42%.
Of course, pgl doesn't even care enough about this to know where the data is...and, apparently,
most 'liberal' economists are just as indifferent to distribution as he is.
Dan Kervick -> JohnH...
If it weren't for Piketty and Saez, we'd still be fumbling around in the dark on income
and wealth distribution.
It shows the dramatic the separation between the top quintile and the bottom 80% during
the Clinton years. Separation was even greater for the top 5%.
Yet the only thing that most economists ever notice is GDP growth...
pgl -> JohnH...
"Yet the only thing that most economists ever notice is GDP growth".
There you go again. Clueless as can be and lying your ass off.
likbez -> pgl...
And what you actually know about methodology of calculation of this GDP number. Inquiring
minds want to know.
Correct calculation of nominal GDP depends on correct calculation of inflation, which is
the most politicized of economic metrics and as such subject to tremendous level of manipulation.
Simon Kuznets, the economist who developed the first comprehensive set of measures of national
income, stated in his first report to the US Congress in 1934, in a section titled "Uses and
Abuses of National Income Measurements":
=== Start of quote ====
The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative
measurements especially, the definiteness of the result suggests, often misleadingly, a
precision and simplicity in the outlines of the object measured. Measurements of national
income are subject to this type of illusion and resulting abuse, especially since they deal
with matters that are the center of conflict of opposing social groups where the effectiveness
of an argument is often contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity
are just as important when income measurements are interpreted from the point of view of
economic welfare. But in the latter case additional difficulties will be suggested to anyone
who wants to penetrate below the surface of total figures and market values. Economic welfare
cannot be adequately measured unless the personal distribution of income is known. And no
income measurement undertakes to estimate the reverse side of income, that is, the intensity
and unpleasantness of effort going into the earning of income. The welfare of a nation can,
therefore, scarcely be inferred from a measurement of national income as defined above.
"... then from Romer's assumptions the rival inputs cannot be earning their marginal product. ..."
"... The "mathiness" comes from authors trying to elide the fact that they are abandoning (1) or (2). ... ..."
"... Four-fifths of the "Economy" is a Complete Waste of Time ..."
"... I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's neither good nor bad that the economy ACTUALLY produces wasteful output. ..."
"... The amount of wasteful output "serves as an index" for the amount of useful output that could be produced if the economy wasn't producing wasteful output. ..."
"... "In a perfect free market world where the price mechanism adjusts production to our wishes and all externalities are priced in, GDP measures economic happiness." ..."
"... On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models." ..."
"... why do economies grow vulnerable over time ..."
"... On the Bagehot question, economists were initially caught flat-footed, for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate the problems of leverage because there is no room for such problems in representative-agent models. ..."
"... Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment ..."
More from Paul Romer on "mathiness" -- this time the use of math in finance to obfuscate communication
with regulators:
Using Math to Obfuscate
- Observations from Finance: The usual narrative suggests that the new mathematical tools of modern
finance were like the wings that Daedalus gave Icarus. The people who put these tools to work soared
too high and crashed.
In two posts,
here
and
here, Tim Johnson notes that two government investigations (one
in the UK, the other
in the US) tell a different tale. People in finance used math to hide what they were doing.
One of the premises I used to take for granted was that an argument presented using math would
be more precise than the corresponding argument presented using words. Under this model, words from
natural language are more flexible than math. They let us refer to concepts we do not yet fully understand.
They are like rough prototypes. Then as our understanding grows, we use math to give words more precise
definitions and meanings. ...
I assumed that because I was trying to use math to reason more precisely and to communicate more
clearly, everyone would use it the same way. I knew that math, like words, could be used to confuse
a reader, but I assumed that all of us who used math operated in a reputational equilibrium where
obfuscating would be costly. I expected that in this equilibrium, we would see only the use of math
to clarify and lend precision.
Unfortunately, I was wrong even about the equilibrium in the academic world, where
mathiness is in fact used to obfuscate. In the world
of for-profit finance, the return to obfuscation in communication with regulators is much higher,
so there is every reason to expect that mathiness would be used liberally, particularly in mandated
disclosures. ...
We should expect that there will be mistakes in math, just as there are mistakes in computer code.
We should also expect some inaccuracies in the verbal claims about what the math says. A small number
of errors of either type should not be a cause for alarm, particularly if the math is presented transparently
so that readers can check the math itself and check whether it aligns with the words. In contrast,
either opaque math or ambiguous
verbal statements about the math should be grounds for suspicion. ...
I always loved Boulding's somewhat critical review of Samuelson, discussing the limits of the mathematicization
of economic theory. Of course Samuelson was the tip of the iceberg, and since then many overconfident
economic mathematicians have led to very serious financial problems. I had one stats professor who
called a complex theory on the blackboard "graffiti."
Samuelson did not do math for math's sake. He figured out first what the real world issue was and
then used math to help explain his insights.
likbez -> pgl...
You need to distinguish "math" from "mathematical masturbation", or as they are now more politically
correctly called "mathiness".
Many economic works that use differential equations belong to the latter category ;-). A lot of
pitiful clowns pretending to be mathematicians do not even bother to understand what is the precision
and error bounds of the input data. As in "garbage in, garbage out".
This is probably a unique case when mathematic equations are used to support particular political
ideology. Support via "scietification" (as in Church of Scientology) of essentially political statements.
Especially about unemployment and poverty.
anne -> anne...
All in all, the past 7 years have been a very good time for old-fashioned macroeconomics. But of
course nothing will make the Germans, or the U.S. right, concede that Keynesian ideas have worked.
[ Keynesian ideas have worked? Influential among policy makers in general or not, Keynesian ideas
have worked. ]
pgl -> anne...
Keynesian theory explains what happened. But what happened was the our policy makers failed to
do the right thing. Had they listened to Keynes - the recoveries would have been much faster.
likbez -> pgl...
"Had they listened to Keynes - the recoveries would have been much faster."
This was impossible. There is such thing as "Intellectual capture". As Keyes noted
"The ideas of economists and political philosophers, both when they are right and when they are wrong
are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical
men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves
of some defunct economist."
Dietz Vollrath explains the "mathiness" debate (and also Euler's theorem in a part of the post I left
out). Glad he's interpreting Romer -- it's very helpful:
What
Assumptions Matter for Growth Theory?: The whole "mathiness" debate that Paul Romer started tumbled
onwards this week... I was able to get a little clarity in this whole "price-taking" versus "market
power" part of the debate. I'll circle back to the actual "mathiness" issue at the end of the post.
There are really two questions we are dealing with here. First, do inputs to production earn their
marginal product? Second, do the owners of non-rival ideas have market power or not? We can answer
the first without having to answer the second.
Just to refresh, a production function tells us that output is determined by some combination of non-rival
inputs and rival inputs.
Non-rival inputs are things like ideas that can be used by many firms or people at once without
limiting the use by others. Think of blueprints.
Rival inputs are things that can only be used by one person or firm at a time. Think of nails.
The income earned by both rival and non-rival inputs has to add up to total output.
Okay, given all that setup, here are three statements that could be true.
Output is constant returns to scale in rival inputs
Non-rival inputs receive some portion of output
Rival inputs receive output equal to their marginal product
Pick two.
Romer's argument is that (1) and (2) are true. (1) he asserts through replication arguments, like
my example of replicating Earth. (2) he takes as an empirical fact. Therefore, (3) cannot be true.
If the owners of non-rival inputs are compensated in any way, then it is necessarily true that rival
inputs earn less than their marginal product.
Notice that I don't need to say anything about how the non-rival inputs are compensated
here. But if they earn anything, then from Romer's assumptions the rival inputs cannot
be earning their marginal product.
Different authors have made different choices than Romer.
McGrattan and Prescott
abandoned (1) in favor of (2) and (3).
Boldrin and Levine dropped
(2) and accepted (1) and (3). Romer's issue with these papers is that (1) and (2) are clearly true,
so writing down a model that abandons one of these assumptions gives you a model that makes no sense
in describing growth. ...
The "mathiness" comes from authors trying to elide the fact that they are abandoning (1) or (2).
...
[There's a lot more in the full post. Also, Romer comments on Vollrath
here.]
Paine
Excellent
Lots of conclusions are per determined by simple assumptions like constant returns to scale
If by scale we mean replication of the existing production system on a larger scale
Where say we triple every plant and highway etc
The model nicely captures the reality of a static production system
Where all factors are expandable even if at a cost
This is a very narrow notion of scale effects
If for example markets for oust expand and a different technique is optimal
Then there's a dynamic transition
Where residuals emerge.
anne -> Paine ...
I assume this is the reference which the writer is too inconsiderate to mention:
But in actuality there is nothing but assertion of various hypothetical entities behind the entire
neo classical construct
No matter how carefully these atoms are defined they remain figments
That one can conjure like epicycles
Example
Advertising Is a production factor -- Once we move away from he material basis of production lots
of spirits dance in the air around us
Once a non rival good has been discovered or invented or created etc it's cost to replicate is
nearly zero
To lay the bulk of profits at its feet is ridiculous of course. But intellectual property none
the less is a growing means of exploitation...
Paine -> Paine ...
My definition of non rival is wrong of course. The meaning of non rival is castlessly inexhaustible
Nothing fits this description exactly. And almost is as bad as not at all.
Non rival -- Example of belief in the divinity of Jesus. I can believe as much whether you believe
or not
anne -> Paine ...
All exchange value flows from labor time. Even if in complex patterns easily mystified by simple
definitions. Of imaginary objects like non-rival production factors
[ I understand and am pleased. ]
Sandwichman said...
Four-fifths of the "Economy" is a Complete Waste of Time
"There are really two questions we are dealing with here. First, do inputs to production earn their
marginal product? Second, do the owners of non-rival ideas have market power or not?" -- Dietz Vollrath
"What Assumptions Matter for Growth Theory?"
"Dietz Vollrath has a new post that goes a long way toward clarifying the battle lines in the fight
over the foundations of growth theory." -- Paul Romer, "The Assumptions in Growth Theory"
Huh? These fellows omit the main assumption, the analogy -- "growth is a concept whose proper domicile
is the study of organic units..." (Kuznets, 1947). Kuznets cited with approval Sidney Hook's discussion
of the dangers of the use of this analogy.
"As an argument it is formally worthless and never logically compelling. An argument from analogy
can be countered usually with another argument from analogy which leads to a diametrically opposed
conclusion.... The belief that society is an organism is an old but fanciful notion. It can only be
seriously entertained by closing the eye to all the respects in which a group of separate individuals
differs from a system of connected cells, and by violently redefining terms like 'birth,' 'reproduction,'
and 'death.'"
Growth "theory" gets around this objection to the uncritical use of analogy by ignoring it -- by
'closing the eye' to explicit caveats in the seminal contribution to the measurement of growth. Let's
pretend that the economy really is an organism that grows perpetually but never dies.
Four-fifths of the "Economy" is a Complete Waste of Time
-- Sandwichman
Sandwichman -> Sandwichman...
1. "growth is a concept whose proper domicile is the study of organic units..."
2. "The belief that society is an organism is an old but fanciful notion."
3. ?
4. Growth!
Sandwichman -> anne...
"the meaning of per capita growth in China over these last 38 years of 8.6% yearly"
It means, literally, that if you ate one bowl of rice for dinner in 1977, in 2015 you would eat
23 bowls of rice for dinner. Of course it doesn't *really* mean that. The "measurement" is actually
a figure of speech.
Figuratively, it means something more like: many more Chinese own cars today than 38 years ago and
those cars are worth hundreds of times what the old bicycle was worth. Never mind that the car is
used to commute to work, that it takes as long to drive to work through congested traffic as it once
did to ride a bike to work and that the air is unbreathable so it would be suicide to go back to riding
a bike.
Still, growing 8.6% per year for 38 years is a prodigious achievement even if we don't know what
it means.
Sandwichman -> anne...
A large part of that gain in life expectancy is attributable to an enormous decline in infant mortality.
Expenditures on improved infant health care would be only a miniscule portion of the total economic
growth.
When I say "prodigious" I mean remarkable or immense without attaching any value judgement about whether
it is a good or a bad thing. There have obviously been some good things associated with that growth
-- see infant mortality. There has also been an explosion of GHG emissions. If 2/3 of that growth
was good things (reduced infant mortality, improved nutrition etc.) and 1/3 bad things (police surveillance,
cost of commuting to work, etc.) then China would have been better off with a 6% growth rate.
Can't we just forget about the confounded aggregate and get on with promoting the good? No, apparently
not. Two pieces of pie is better than one if it's cherry pie but not if it's "dirt" pie.
anne -> Sandwichman...
Can't we just forget about the confounded aggregate and get on with promoting the good?
[ Surely so, but if a part of the good is life span, well, that of India is 66 years which shows how
far China has come and I really do know of the problems. ]
anne -> Sandwichman...
Again, I am waiting for an explanation of or a description showing what the past 38 years of per
capita growth in China represent. What does the past 38 years of astonishing gains in Chinese productivity
represent and how to depict these gains?
Paine -> anne...
We need a welfare index. And that greatly increases the degree of difficulty over a simple output
index
And do you know what the overwhelming response of economists was to that article? "Nothing new
here." "We know GDP is not a measure of welfare. But it's useful because it tells us about the capacity
to produce goods that could enhance welfare."
Or to paraphrase Orwell, "If this boot wasn't stamping on your face, you could put it on your foot
and it would keep your toes warm -- FOREVER!" Paul Samuelson's version, "Evaluation of Real National
Income":
"Production possibilities as such have no normative connotations. We are interested in them for
the light they throw on utility-possibilities. This is why economists have wanted to include such
wasteful output as war goods in their calculations of national product; presumably they serve as
some kind of an index of the useful things that might be produced in better times."
I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's neither
good nor bad that the economy ACTUALLY produces wasteful output.
The amount of wasteful output "serves as an index" for the amount of useful output that could
be produced if the economy wasn't producing wasteful output.
Some Kind of an Index -- No Normative Connotations
-- Sandwichman
Julio -> Sandwichman...
A question for you folks in this subthread:
"In a perfect free market world where the price mechanism adjusts production to our wishes and
all externalities are priced in, GDP measures economic happiness."
Proposition: That myth underlies our world.
Conclusion: In our world, "GDP is not correlated to happiness" is, therefore, a subversive
statement.
Is this sensible, and if so, does it make alternative measures of economic well-being difficult
to construct?
Julio -> Sandwichman...
Aggregate is not the same as average.
The "prices as the driver" argument is that you will buy a yellow car and I a green one, and Detroit
will make just enough of each, and that's the closest we'll ever come to an economy that reflects
our wishes, and that's in turn the closest we'll ever come to (economic) happiness.
But this may be an aside: is your point that a "welfare index", as paine proposes, is unrealistic
and so irrelevant?
We could measure economic decisions by using economics as far as it takes us to evaluate their
consequences, and then using our moral compass to do the measuring.
A more ad-hoc method which, for our collective decisions, has political pitfalls; but politics
is the appropriate forum for those fights. We would no longer know (or care) what "progress" is, as
a national aggregate.
Sandwichman -> Julio...
"is your point that a "welfare index", as paine proposes, is unrealistic and so irrelevant?"
No, it's not entirely unrealistic and irrelevant but it IS very limited and, like GDP subject to misinterpretation
as more substantive than it is.
The thing about GDP that won't be gotten away from is that it does provide information that is useful
for projecting revenues for business and for government.
A welfare index wouldn't do that. You can tax income but you can't tax happiness -- at least not
literally.
anne -> Sandwichman...
The measurement of economic well-being is inherently difficult (impossible) because it involves
the aggregation of subjective judgments....
[ Agreed. ]
anne -> Sandwichman...
The sort of growth-happiness surveying referred to is to my mind no more than pseudo research.
As empirical as bumble bees.
Sandwichman -> anne...
anne, I tend to agree with your skepticism about happiness surveying. However, I have also worked
on so-called real survey research -- Canadian census. If you saw how the sausage was made...
"...On the Bagehot question, economists were initially caught flat-footed, for two reasons:
failure to realize that shadow banking had recreated the risk of bank runs, and failure to appreciate
the problems of leverage because there is no room for such problems in representative-agent models."
Gavyn Davis has a
good summary of the recent IMF conference on rethinking macro;
Mark Thoma has further thoughts. Thoma in particular is disappointed that there hasn't been more
of a change, decrying
the arrogance that asserts that we have little to learn about theory or
policy from the economists who wrote during and after the Great Depression.
Maybe surprisingly, I'm a bit more upbeat than either. Of course there are
economists, and whole departments, that have learned nothing, and remain wholly dominated by
mathiness. But it seems to be that economists have done
OK on two of the big three questions raised by the economic crisis. What are these three questions?
I'm glad you asked.
As I see it, it makes sense to think of what happened in terms of three phases.
First, a buildup of vulnerability, with rising leverage and an increasingly
fragile financial system.
Second, the acute phase of crisis, with bank runs or their functional equivalent,
collapsing liquidity, and more.
Then a long period of depressed employment and activity, which still isn't
over.
The questions then are how and why each of these things can/did happen. I
think of these as the Minsky question - why do economies grow vulnerable over time ; the Bagehot
question - why does all hell break loose now and then; and the Keynes question - how economies can
stay depressed, and how such depressed economies work.
On the Keynes question, it's true that we haven't had a radical change in
thinking, but that's mainly because the old thinking still works pretty well. That is, the answer for
people asking who would be the new Keynes turns out to be that Keynes is the new Keynes. Or maybe that's
Hicks - anyway, IS-LMish analysis worked well, and the economists who made fools of themselves were
those who rejected the time-tested approaches.
What is new is that we have had a flowering of empirical work, and have much
more econometric evidence on monetary and especially fiscal policy, price behavior, and more than we
used to. Look, for example, at Nakamura/Steinsson's
survey, or at the Blanchard work on multipliers in the euro area. So this is a happy story: the
existing framework worked fairly well, and is now buttressed by a lot of really good empirical evidence.
On the Bagehot question, economists were initially caught flat-footed,
for two reasons: failure to realize that shadow banking had recreated the risk of bank runs, and failure
to appreciate the problems of leverage because there is no room for such problems in representative-agent
models. But it wasn't very hard to fix these problems, or at least apply workable patches. Once
you realized that
repo was the new bank deposits, the basic crisis framework was already there; and there was already
enough existing analysis of balance-sheet constraints and all that to make creation of a somewhat messy,
inelegant, but usable set of models quite easy.
And here too we have seen a flowering of empirical work, e.g.
Mian and Sufi on household debt.
Where we have not, as far as I can tell, made much progress is the Minsky
question. Why did the system become so vulnerable? Was it deregulation (or failure of regulation to
keep up with institutional change)? Simple forgetting, as memories of past crises faded? Excessively
loose policy? I have views, but I have to admit that there isn't a lot of either fresh thinking or
hard evidence here.
Why is Minsky still mostly missing? Partly because asking how we got here
may be less urgent than the question of what we do now. But also, I'd guess, because it's hard. Bubbles,
excessive leverage, and all that probably have a lot to do with the limits of rationality, and behavioral
economics doesn't provide anything like as much guidance as it should.
Still, I'm relatively positive in my assessment of the state of macroeconomics.
Against mathiness and political ideology, the gods themselves contend in vain, but that's not a problem
with the models
kbaa, The Irate Plutokrat
It is good to see Krugman write in opposition to 'mathiness', economists'
misuse of mathematics to justify their pet theories. And his suggestion that 'behavioral economics
doesn't provide anything like as much guidance as it should' is probably as close to an admission
as we are ever likely to get from an academic economist that it's human psychology that drives the
economy after all, and that all of the various high minded macroeconomics theories are nothing more
than propaganda to be used by lobbyists who present them as scholarship.
Economics is a subject that is driven by data, i.e. numbers. Wherever there are numbers there is always
the possibility of misusing mathematics to intimidate. Any paper that cites game theory or the Euler
consumption equation to promote public policy should be regarded as fraudulent until shown to be otherwise.
Mathematics serves the same function for academic economists as Latin theology did for medieval clerics:
both provide an aura of erudite wisdom where there is no wisdom at all to be found.
NB For those who have never studied Calculus, "Euler" is pronounced "oiler", but there's no connection
with the price of oil or any other commodity, and don't let any academic economist try to tell you
otherwise.
Yet Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested
in playing with mathematical models than in trying to understand how the world actually works. Mr.
Lucas, we are told, is following in the tradition of the "French mathematician Leon Walras [who] pictured
the economy as a system of simultaneous equations." The very idea is made to sound slightly crazed.
This brings us to the biggest problem with "Keynes." Mr. Skidelsky admits to being poorly trained
in the tools that economists use: "I find mathematics and statistics 'challenging,' as they say, and
it is too late to improve. This has, I believe, saved me from important errors of thinking."
Has it, really? Mr. Skidelsky would like to think that his math-aversion allows him to focus on
the big ideas rather than being distracted by mere analytic details. But mathematics is, fundamentally,
the language of logic. Modern research into Keynes's theories-I have conducted such research myself-tries
to put his ideas into mathematical form precisely to figure out whether they logically cohere. It turns
out that the task is not easy.
Keynesian theory is based in part on the premise that wages and prices do not adjust to levels
that ensure full employment. But if recessions and depressions are as costly as they seem to be,
why don't firms have sufficient incentive to adjust wages and prices quickly, to restore equilibrium?
This is a classic question of macroeconomics that, despite much hard work, is yet to be fully resolved.
Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the
anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate
points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far.
Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions
than compelling answers.
Dietz Vollrath explains the "mathiness" debate (and also Euler's theorem in a part of the post
I left out). Glad he's interpreting Romer -- it's very helpful:
What Assumptions Matter for Growth Theory?: The whole "mathiness" debate that Paul Romer
started tumbled onwards this week... I was able to get a little clarity in this whole "price-taking"
versus "market power" part of the debate. I'll circle back to the actual "mathiness" issue
at the end of the post.
There are really two questions we are dealing with here. First, do inputs to production earn
their marginal product? Second, do the owners of non-rival ideas have market power or not?
We can answer the first without having to answer the second.
Just to refresh, a production function tells us that output is determined by some combination
of non-rival inputs and rival inputs.
Non-rival inputs are things like ideas that can be used by many firms or people at once
without limiting the use by others. Think of blueprints.
Rival inputs are things that can only be used by one person or firm at a time. Think
of nails.
The income earned by both rival and non-rival inputs has to add up to total output.
Okay, given all that setup, here are three statements that could be true.
Output is constant returns to scale in rival inputs
Non-rival inputs receive some portion of output
Rival inputs receive output equal to their marginal product
Pick two.
Romer's argument is that (1) and (2) are true. (1) he asserts through replication arguments,
like my example of replicating Earth. (2) he takes as an empirical fact. Therefore, (3) cannot
be true. If the owners of non-rival inputs are compensated in any way, then it is necessarily
true that rival inputs earn less than their marginal product.
Notice that I don't need to say anything about how the non-rival inputs are compensated
here. But if they earn anything, then from Romer's assumptions the rival inputs
cannot be earning their marginal product.
Different authors have made different choices than Romer.
McGrattan
and Prescott abandoned (1) in favor of (2) and (3).
Boldrin
and Levine dropped (2) and accepted (1) and (3). Romer's issue with these papers is that
(1) and (2) are clearly true, so writing down a model that abandons one of these assumptions
gives you a model that makes no sense in describing growth. ...
The "mathiness" comes from authors trying to elide the fact that they are abandoning (1)
or (2). ...
[There's a lot more in the full post. Also, Romer comments on Vollrath
here.]
Paine
Excellent !
Lots of conclusions are per determined by simple assumptions like constant returns to scale.
If by scale we mean replication of the existing production system on a larger scale
Where say we triple every plant and highway etc
The model nicely captures the reality of a static production system
Where all factors are expandable even if at a cost
This is a very narrow notion of scale effects
If for example markets for oust expand and a different technique is optimal
Then there's a dynamic transition
Where residuals emerge.
anne -> Paine ...
I assume this is the reference which the writer is too inconsiderate to mention:
But in actuality there is nothing but assertion of various hypothetical entities behind the
entire neo classical construct
No matter how carefully these atoms are defined they remain figments
That one can conjure like epicycles
Example
Advertising Is a production factor -- Once we move away from he material basis of production
lots of spirits dance in the air around us
Once a non rival good has been discovered or invented or created etc it's cost to replicate
is nearly zero
To lay the bulk of profits at its feet is ridiculous of course. But intellectual property
none the less is a growing means of exploitation...
Paine -> Paine ...
My definition of non rival is wrong of course. The meaning of non rival is castlessly inexhaustible
Nothing fits this description exactly. And almost is as bad as not at all.
Non rival -- Example of belief in the divinity of Jesus. I can believe as much whether you
believe or not
anne -> Paine ...
All exchange value flows from labor time. Even if in complex patterns easily mystified
by simple definitions. Of imaginary objects like non-rival production factors
[ I understand and am pleased. ]
Sandwichman said...
Four-fifths of the "Economy" is a Complete Waste of Time
"There are really two questions we are dealing with here. First, do inputs to production earn
their marginal product? Second, do the owners of non-rival ideas have market power or not?"
-- Dietz Vollrath "What Assumptions Matter for Growth Theory?"
"Dietz Vollrath has a new post that goes a long way toward clarifying the battle lines in the
fight over the foundations of growth theory." -- Paul Romer, "The Assumptions in Growth Theory"
Huh? These fellows omit the main assumption, the analogy -- "growth is a concept whose proper
domicile is the study of organic units..." (Kuznets, 1947). Kuznets cited with approval Sidney
Hook's discussion of the dangers of the use of this analogy.
"As an argument it is formally worthless and never logically compelling. An argument from
analogy can be countered usually with another argument from analogy which leads to a diametrically
opposed conclusion.... The belief that society is an organism is an old but fanciful notion.
It can only be seriously entertained by closing the eye to all the respects in which a group
of separate individuals differs from a system of connected cells, and by violently redefining
terms like 'birth,' 'reproduction,' and 'death.'"
Growth "theory" gets around this objection to the uncritical use of analogy by ignoring
it -- by 'closing the eye' to explicit caveats in the seminal contribution to the measurement
of growth. Let's pretend that the economy really is an organism that grows perpetually but
never dies.
Four-fifths of the "Economy" is a Complete Waste of Time
-- Sandwichman
Sandwichman -> Sandwichman...
1. "growth is a concept whose proper domicile is the study of organic units..."
2. "The belief that society is an organism is an old but fanciful notion."
3. ?
4. Growth!
Sandwichman -> anne...
"the meaning of per capita growth in China over these last 38 years of 8.6% yearly"
It means, literally, that if you ate one bowl of rice for dinner in 1977, in 2015 you would
eat 23 bowls of rice for dinner. Of course it doesn't *really* mean that. The "measurement"
is actually a figure of speech.
Figuratively, it means something more like: many more Chinese own cars today than 38 years
ago and those cars are worth hundreds of times what the old bicycle was worth. Never mind that
the car is used to commute to work, that it takes as long to drive to work through congested
traffic as it once did to ride a bike to work and that the air is unbreathable so it would
be suicide to go back to riding a bike.
Still, growing 8.6% per year for 38 years is a prodigious achievement even if we don't know
what it means.
Sandwichman -> anne...
A large part of that gain in life expectancy is attributable to an enormous decline in infant
mortality. Expenditures on improved infant health care would be only a miniscule portion of
the total economic growth.
When I say "prodigious" I mean remarkable or immense without attaching any value judgement
about whether it is a good or a bad thing. There have obviously been some good things associated
with that growth -- see infant mortality. There has also been an explosion of GHG emissions.
If 2/3 of that growth was good things (reduced infant mortality, improved nutrition etc.) and
1/3 bad things (police surveillance, cost of commuting to work, etc.) then China would have
been better off with a 6% growth rate.
Can't we just forget about the confounded aggregate and get on with promoting the good? No,
apparently not. Two pieces of pie is better than one if it's cherry pie but not if it's "dirt"
pie.
anne -> Sandwichman...
Can't we just forget about the confounded aggregate and get on with promoting the good?
[ Surely so, but if a part of the good is life span, well, that of India is 66 years which
shows how far China has come and I really do know of the problems. ]
anne -> Sandwichman...
Again, I am waiting for an explanation of or a description showing what the past 38 years
of per capita growth in China represent. What does the past 38 years of astonishing gains in
Chinese productivity represent and how to depict these gains?
Paine -> anne...
We need a welfare index. And that greatly increases the degree of difficulty over a simple
output index
And do you know what the overwhelming response of economists was to that article? "Nothing
new here." "We know GDP is not a measure of welfare. But it's useful because it tells us about
the capacity to produce goods that could enhance welfare."
Or to paraphrase Orwell, "If this boot wasn't stamping on your face, you could put it on
your foot and it would keep your toes warm -- FOREVER!" Paul Samuelson's version, "Evaluation
of Real National Income":
"Production possibilities as such have no normative connotations. We are interested in
them for the light they throw on utility-possibilities. This is why economists have wanted
to include such wasteful output as war goods in their calculations of national product;
presumably they serve as some kind of an index of the useful things that might be produced
in better times."
I repeat, NO NORMATIVE CONNOTATIONS. What part of "no" do people not understand? It's
neither good nor bad that the economy ACTUALLY produces wasteful output.
The amount of wasteful output "serves as an index" for the amount of useful output that
could be produced if the economy wasn't producing wasteful output.
Some Kind of an Index -- No Normative Connotations
-- Sandwichman
Julio -> Sandwichman...
A question for you folks in this subthread:
"In a perfect free market world where the price mechanism adjusts production to our wishes
and all externalities are priced in, GDP measures economic happiness."
Proposition: That myth underlies our world.
Conclusion: In our world, "GDP is not correlated to happiness" is, therefore, a subversive
statement.
Is this sensible, and if so, does it make alternative measures of economic well-being difficult
to construct?
Julio -> Sandwichman...
Aggregate is not the same as average.
The "prices as the driver" argument is that you will buy a yellow car and I a green one,
and Detroit will make just enough of each, and that's the closest we'll ever come to an economy
that reflects our wishes, and that's in turn the closest we'll ever come to (economic) happiness.
But this may be an aside: is your point that a "welfare index", as paine proposes, is unrealistic
and so irrelevant?
We could measure economic decisions by using economics as far as it takes us to evaluate
their consequences, and then using our moral compass to do the measuring.
A more ad-hoc method which, for our collective decisions, has political pitfalls; but politics
is the appropriate forum for those fights. We would no longer know (or care) what "progress"
is, as a national aggregate.
Sandwichman -> Julio...
"is your point that a "welfare index", as paine proposes, is unrealistic and so irrelevant?"
No, it's not entirely unrealistic and irrelevant but it IS very limited and, like GDP subject
to misinterpretation as more substantive than it is.
The thing about GDP that won't be gotten away from is that it does provide information that
is useful for projecting revenues for business and for government.
A welfare index wouldn't do that. You can tax income but you can't tax happiness -- at least
not literally.
anne -> Sandwichman...
The measurement of economic well-being is inherently difficult (impossible) because it involves
the aggregation of subjective judgments....
[ Agreed. ]
anne -> Sandwichman...
The sort of growth-happiness surveying referred to is to my mind no more than pseudo research.
As empirical as bumble bees.
Sandwichman -> anne...
anne, I tend to agree with your skepticism about happiness surveying. However, I have also
worked on so-called real survey research -- Canadian census. If you saw how the sausage was
made...
Microfoundations from Acemogl, Oxdaglar, and Tahbaz-salehi:
Microeconomic origins of macroeconomic tail risks, by Daron Acemoglu, Asuman Ozdaglar, and
Alireza Tahbaz-Salehi: Understanding large economic downturns is one of macroeconomics'
central goals. This column argues that imbalances in input-output linkages can interact with
firm-level shocks to produce output fluctuations that are much larger than the underlying shocks.
The result can be large cycles arising from small, firm-level shocks. It is thus important
to study the determinants of large economic downturns separately. Macroeconomic tail risks
may vary significantly even across economies that exhibit otherwise identical behavior for
moderate deviations.
Most empirical studies in macroeconomics approximate the deviations of aggregate economic variables
(such as the GDP) from their trends with a normal distribution. Besides analytical convenience,
such an approximation has been relatively successful in capturing some of the more salient
features of the behavior of aggregate variables in the US and other OECD countries.
Macroeconomic tail risks
A number of recent studies (see Fagiolo et al. 2008), however, have documented that the distributions
of GDP growth rate in the US and many OECD countries do not follow the normal, or bell-shaped
distribution. Large negative or positive growth rates are more common than the normal distribution
would suggest. That is to say, the distributions exhibit significantly heavier 'tails' relative
to that of the normal distribution. Using the normal distribution thus severely underpredicts
the frequency of large economic downturns.
This divergence can be seen clearly in Figure 1. Panel (a) depicts the quantile-quantile plot
of post-war US GDP growth rate (1947:QI to 2013:QIII) versus the normal distribution after
removing the top and bottom 5% of data points. The close correspondence between this dataset
and the normal distribution, shown as the dashed red line, suggests that once large deviations
are excluded, the normal distribution is indeed a good candidate for approximating GDP fluctuations.
Panel (b) shows the same quantile-quantile plot for the entire US post-war sample. It is easy
to notice that this graph exhibits sizeable and systematic deviations from the normal line
at both ends. Together, these plots suggest that even though the normal distribution does a
fairly good job in approximating the nature of fluctuations during most of the sample, it severely
underestimates the most consequential fact about business cycle fluctuations, namely, the frequency
of large economic contractions.
Figure 1. The quantile-quantile plots of the post-war US GDP growth rate (1947:QI to 2013:QIII)
vs. the standard normal distribution (dashed red line)
Note:
The horizontal axis shows quantiles of the standard normal distribution; the vertical axis
shows quantiles of the sample data.
Input-output linkages, micro shocks, and macro risks
In recent work (Acemoglu et al. 2014), we have argued that input-output linkages between different
firms and sectors within the economy can play a first-order role in determining the depth and
frequency of large economic downturns. Building on an earlier framework by Acemoglu et al.
(2012), we show that if all firms take roughly symmetric roles as input-suppliers to one another
(in what we call a 'balanced' economy), not only GDP fluctuations are normally distributed,
but also large economic downturns are extremely unlikely. In other words, absent any amplification
mechanisms or aggregate shocks, microeconomic firm-level shocks cannot result in macroeconomic
tail risks. More interestingly, this result holds regardless of how these firm-level microeconomic
shocks are distributed.
Our subsequent analyses, however, establish that the irrelevance of microeconomic shocks for
generating macroeconomic tail risks would no longer hold if the economy is 'unbalanced', in
the sense that some firms play a much more important role as input-suppliers than others. More
specifically, we argue that:
The propagation of microeconomic shocks through input-output linkages can significantly increase
the likelihood of large economic downturns.
The implications of our theoretical results can be summarized as follows:
First, the frequency of large GDP contractions is highly sensitive to the nature of microeconomic
shocks.
In particular, in an unbalanced economy, micro shocks with slightly thicker tails can lead
to a significant increase in the likelihood of large economic downturns. This suggests that
unbalanced input-output linkages can lead to the build-up of tail risks in the economy.
Second, depending on the distribution of microeconomic shocks, the economy may exhibit significant
macroeconomic tail risks even though aggregate fluctuations away from the tails can be well-approximated
by a normal distribution.
This outcome is consistent with the pattern of US post-war GDP fluctuations documented in Figure
1.
This observation underscores the importance of studying the determinants of large recessions,
as such macroeconomic tail risks may vary significantly even across economies that exhibit
otherwise identical behaviour for moderate deviations.
Finally, there is a trade-off between the normality of micro-level shocks and imbalances in
the input-output linkages.
An economy with unbalanced input-output linkages subject to normal microeconomic shocks exhibits
deep recessions as frequently as a balanced economy subject to heavy-tailed shocks.
Solving the 'small shocks, large cycles puzzle'
In this sense, our results provide a novel solution to what Bernanke et al. (1996) refer to
as the 'small shocks, large cycles puzzle' by arguing that the interaction between the underlying
input-output structure of the economy and the shape of the distribution of microeconomic shocks
is of first-order importance in determining the nature of aggregate fluctuations.
Conclusion
Understanding the underlying causes of large economic downturns such as the Great Depression
has been one of the central questions in macroeconomics. Our results suggest that the frequency
and depth of such downturns may depend on the interaction between microeconomic firm-level
shocks and the nature of input-output linkages across different firms. This is due to the fact
that the propagation of shocks over input-output linkages can lead to the concentration of
tail risks in the economy. This observation highlights the importance of separately studying
the determinants of large economic downturns, as such macroeconomic tail risks may vary significantly
even across economies that exhibit otherwise identical behaviour for moderate deviations.
References
Acemoglu, D, V M Carvalho, A Ozdaglar, and Al Tahbaz-Salehi (2012), "The network origins of
aggregate fluctuations", Econometrica, 80, 1977–2016.
Acemoglu, D, A Ozdaglar, and A Tahbaz-Salehi (2014), "Microeconomic origins of macroeconomic
tail risks", NBER Working Paper No. 20865.
Bernanke, B, M Gertler, and S Gilchrist (1996), "The financial accelerator and the flight to
quality", The Review of Economics and Statistics, 78, 1–15.
Fagiolo, G, M Napoletano, and A Roventini (2008), "Are output growth-rate distributions fat-tailed?
Some evidence from OECD countries", Journal of Applied Econometrics, 23, 639–669.
anne
Understanding large economic downturns is one of macroeconomics' central goals. This
column argues that imbalances in input-output linkages can interact with firm-level shocks
to produce output fluctuations that are much larger than the underlying shocks. The result
can be large cycles arising from small, firm-level shocks. It is thus important to study
the determinants of large economic downturns separately. Macroeconomic tail risks may vary
significantly even across economies that exhibit otherwise identical behavior for moderate
deviations....
-- Acemogl, Oxdaglar, and Tahbaz-salehi
[ While I may well not understand this, from what I think I understand I have no idea how
this would account for the Depression or the past recession. Precisely how did small firm-level
shocks create the Depression or the past recession? What shocks to what firms, when and where
was there any regulatory response? ]
djb said in reply to anne...
At least when Keynes described a business cycle he aimed to intuitively understand what
the causes were
Here i cant find it
are they saying that societies controlled by monopolies are subject more frequent and severe
cycles?
New Deal democrat said...
"are they saying that societies controlled by monopolies are subject more frequen and severe
cycles?"
Yes, basically that's it. Human decision-makers are fallible. In an oligopoly or monopoly,
all it takes is one bad decision by one CEO to send a shock wave through the entire sector.
Contrast with 100 CEO's of smaller companies in the same sector. Any one or several poor decisions
are unlikely to cause a big disruption.
Or, put another way, the study demonstrates that "the bigger they are, the harder they fall."
Much commentary this year has been devoted to the dramatically negative effect the "sequester"
spending cuts would have on US gross domestic product. In Japan, one leg of Prime Minister Shinzo
Abe's three-part plan to revive the economy is additional state spending, predicted to increase
gross domestic product (GDP) in spite of its damaging effects on Japan's huge debt and budget
deficit.
Yet in both cases, the economic effects predicted are statistical artifacts, not real changes.
GDP, which includes government spending at cost, unlike its treatment of all other economic activity,
is a deeply flawed statistic, rigged up by Keynesians to make Big Government look better.
Several economic statistics have similar flaws. Consumer Price Indexes, for example, no longer
include house prices or any realistic proxy therefore, allowing inflation watchers to miss price
bubbles like that of 2002-06 in the US, which if statistics had been collected properly would
have led to far higher interest rates and a resultant deflation of the housing bubble. Similarly,
the 1996 "hedonic pricing" adjustment, which over-compensates for quality improvements in the
tech sector by pretending that each Moore's Law doubling in chip capacity produces an actual doubling
in value, has suppressed reported CPI inflation since it was introduced.
While the elimination of asset prices from the CPI and the suppression of tech sector inflation
had substantial academic support when they were introduced - in economics, you can always find
academics to support anything - their true driver was political. Politicians like lower interest
rates, which asset-bubble-driven CPI increases would prevent, and want the appearance of good
economic stewardship produced by lower reported CPI figures.
It also doesn't hurt that lower reported CPI figures greatly reduce the actuarial future cost
of social security and other benefits politicians have promised the electorate. Voters will never
notice a little chiseling on the CPI figures by which their benefits are adjusted, whereas they
will certainly notice the tax increases that would be necessary to fund them properly.
The current proposal to adjust benefits by "chained CPI" figures, which reflect a re-balancing
of consumption on price movements that bears no relation to consumers' actual behavior, is another
step in this direction that will remove another tiny slice each year from social security recipients'
welfare. Truly, the proponents of these CPI changes should go into the salami business.
As with the CPI, the designers of the GDP statistic (and its Gross National Product brother,
which bases output on ownership, rather than physical location) had their own political agenda.
Simon Kuznets, who unveiled the GNP statistic to the US Senate in 1934 (and published it in the
National Bureau of Economic Research Bulletin of June 7, 1934) was a lifelong Keynesian who was
trying to put an economically sound foundation under the New Deal's intellectually incoherent
policies. Since he regarded government activity as a positive good that should be expanded in
downturns, he included the cost of government directly in GNP/GDP at full cost -- thus automatically
producing an increase in output when the size of government increases.
Kuznets should not be blamed inordinately. To get GDP, he went through "national income paid
out" and then adjusted for business profits. That's not the way we'd calculate the statistic today,
and it makes the inclusion of government at cost more understandable - he simply assumed government
made neither a profit nor a loss.
In reality, on his methodology, government makes a huge loss, because the market value of its
outputs is greatly exceeded by the cost of its inputs. You can see the effect of this in the US
Postal Service, which some want to privatize, as with a US$4 billion privatization of the Belgian
postal service, planned for this month.
However if you look at the Post Office's financials, privatization is obviously impossible,
because the entity has negative value, with a net worth of minus $35 billion and an operating
loss of $16 billion in 2012. By GDP accounting, if the USPS is included in government its output
is deemed to be its $81 billion of expenses, while considered as a private sector entity its output
is only $65 billion.
From a national accounting perspective, the US Postal Service is one of the easiest bits of
government to assess: its output is sold at market prices, just like a private corporation, albeit
a horrendously unprofitable one. Other parts of government are much more difficult. The State
Department and Department of Defense have no measurable outputs at all and, in the case of defense,
vast inputs, yet few would argue that the government could function without them, at least in
some form.
Conversely, the Environmental Protection Agency, issuing regulations covering effectively the
whole of US economic activity, imposes a vast hidden cost through regulation that is nowhere accounted
for in GDP. That's the pernicious effect of regulation: if the US improved automobile fuel efficiency
through a higher gasoline tax, the costs would be out there for all to see, whereas by imposing
the Corporate Average Fuel Economy Standards the EPA is able to impose far higher costs on the
economy that are completely invisible directly.
Some of those costs are visible indirectly, in the higher costs and lower profits of US automobile
manufacturers; others, such as the additional lives lost of inadequately protected passengers
in high-gas-mileage cars involved in automobile accidents, are completely invisible. (Lives would
also be lost if a higher gas tax caused manufacturers to make the automobile fleet flimsier, but
in that case consumers would have the option of buying a steel-reinforced gas guzzler and paying
the extra fuel cost, whereas under CAFE regulation they don't.)
There are thus two approaches to reforming GDP. One would be to take each division of government
and attempt to assess the value of its output, which is negative in the case of the EPA, parts
of the Commerce and Agriculture Departments (protectionism) and possibly the Education Department
(dumbing down schools).
That sounds like a fun intellectual exercise, but it would involve endless political judgments
about which the two sides could not possibly agree. In the extraordinary US political system,
that could perhaps be managed - you could have two different party groups in the Congressional
Budget Office, producing Republican and Democrat GDP estimates. The Republican estimate would
take a free market approach, assigning a negative value to large parts of government. Conversely
the Democrat estimate could go further than current GDP accounting, and include all kinds of hedonic
adjustments, as in Joseph Stiglitz's "well-being" proposal, supported by France's ex-president
Nicolas Sarkozy in 2009. However every time control of congress changed, the "official" estimates
of GDP would be revolutionized, altering the entire economic history of the preceding decade -
and causing the utmost confusion in the markets.
A better alternative therefore would be to ignore government altogether, and calculate a Gross
Private Product, the national output of the private sector, from which almost all government costs
must in any case be borne. To a first order of accuracy, this can be done already from the Bureau
of Economic Analysis' published data - you simply subtract line 21 (government consumption expenditures
and gross investment) from GDP (line 1) and the result is a decent ballpark estimate of GPP.
Using GPP, US economic history takes a different shape, most notably around World War II. Economic
growth becomes more sluggish in 1933-38 than the conventional record shows, (still with a downturn
in 1937-38) then in 1939-40 (after the November 1938 mid-term congressional elections had swung
heavily to a bipartisan conservative consensus and stopped the New Deal in its tracks) there was
a rapid recovery that brought back the output levels of 1929. Later, instead of soaring in World
War II as did GDP, GPP was squeezed during the war, before enjoying an astonishing recovery in
1946 that doubled real GPP and finally pushed prosperity beyond 1920s levels.
Paul Krugman proposed in 2011 that the US would benefit from an alien invasion, since the military
expenditure on death rays and so forth to fight the aliens would stimulate the economy. Indeed,
later he even proposed that the government stage a fake alien invasion to achieve the same effect.
His proposal demonstrates nicely the fallacy of GDP accounting.
Under GPP, the additional government waste on death rays would be ignored, while GPP would
decline as the private sector was squeezed to provide the resources for the extra military spending.
Krugman's proposal also illustrates nicely the intellectual (and incipient financial) bankruptcy
of Keynesianism; it's obvious nonsense if you do the accounting properly.
GPP accounting also illustrates the true effect of government cutbacks in the last six months.
First quarter GPP, boosted by the sequester and defense cuts, both of which allowed more room
for the private sector to thrive, grew at 4.1% compared with the anemic 2.4% growth in GDP. It's
not surprising the stock market has taken off.
When leftists whine that cutbacks will destroy growth or cheer that stimulus spending will
increase it, they can be confident of their forecast - because the GDP statistic is constructed
to make it true. The spending stimulus of 2009-10, which peaked in the fourth quarter of 2009,
delayed the recovery of GPP by six months, into 2010.
Moving from GDP to GPP would kill off many damaging economic policies, as well as giving us
a much better picture of where the economy is really going. It's a slam-dunk.
(Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value
of goods and services produced in a country. Gross National Product (GNP) is a measure of a country's
economic performance, or what its citizens produced (ie, goods and services) and whether they
produced these items within its borders.)
Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can
be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of
Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only
in a Kindle edition, Alchemists of Loss in both Kindle and print editions.
(Republished with permission from PrudentBear.com. Copyright 2005-13 David W Tice & Associates.)
Nice article. I would repeat a point I made in a previous thread that the GDP of the USA is
a fiction. Using the methodology to define the CPI pre-1990, the current and for most of the last
20 years CPI in the US is understated by a factor of two. This is a big deal since it means that
the GDP growth in the range of 3% was more like zero and periods of no-growth were actual contractions.
The CPI is only one component of the GDP deflator but there is indication that producer price
increases have been quite high too.
The mass migration of US factory jobs to China and all the "right-sizing" and "down-sizing"
was not for free and it looks like the US GDP has been stagnating for the last 20 years. I originally
bought into the line that there were productivity gains, but there were also major wage reductions
(all those lost manufacturing jobs were replaced with low pay service sector jobs.) All the talk
about the new electronic economy was a crock too since those jobs went to China and India as well.
The only source of growth that I can see is population increase in the US which is significant
at around 2%.
So I would say the US GDP is closer to 10 trillion and not the 15 trillion that is being
trumpeted in the media. China is a bigger economy now than the USA, except in per capita
terms. The estimate of 2050 for the BRICS to overtake the west is based on overly rosy figures
for the western GDP. There are too many inflation measurement shenanigans to take these figures
at face value. So my thinking is that Uncle Sam and his minions will be able to do nothing to
stop the US dollar from losing its world reserve status. The BRICS are not Iraq or Iran. Even
Iran is an impossible nut for the west to crack since there is no way there is going to be an
Iraq style invasion due to the much larger size and military capability of Iran compared to Iraq.
Bunker busters will not do much either. Trying to bomb Iran back into the stone age will fail
as well since Iran has surface to air missile systems that will actually bring down US jets and
not some junk from the sixties.
There is a longish article on the value (and misuse) of the GDP stats in the
Sunday NYT magazine.
The author lays out the case that the US will, over the next few years, supplement or perhaps
even replace GDP as the ultimate measure of economic growth.
In its place? Several 100 metrics that measure all manner of other factors, both quantitative
and qualitative.
This is intriguing, for numerous reasons. First, of all the official economic data points the
government releases, GDP is the easiest to game - you simply under-report inflation, and GDP appears
to be better than it is. And ever since the Boskin Commission's misbehavior (I call it a cowardly
theft from the elderly), we have been dramatically under-reporting inflation data. Hence, we have
nearly two decades of bogus GDP data in the can.
Second, and perhaps more significantly, GDP simply measures how much stuff we produce, buy
and sell, and the folks we hire to make that stuff. It ignores all manner of other elements that
go into that process.
I am not suggesting that GDP is a valueless measure (at least, if it were somewhat more accurate).
But it is woefully incomplete. And the impact of making policy towards GDP has had very specific,
corporate benefits. If we were to incorporate other more human factors, the net result could be
quite substantial.
I wonder if we might see some sort of a pushback on this, especially from the Randians and
Chicago-ites.
Regardless, it is a worthwhile topic to think about, if you are at all interested in how the
government deploys its substantial resources into the economy.
Here is an excerpt:
"Whatever you may think progress looks like - a rebounding stock market, a new house, a
good raise - the governments of the world have long held the view that only one statistic,
the measure of gross domestic product, can really show whether things seem to be getting better
or getting worse. G.D.P. is an index of a country's entire economic output - a tally of, among
many other things, manufacturers' shipments, farmers' harvests, retail sales and construction
spending. It's a figure that compresses the immensity of a national economy into a single data
point of surpassing density. The conventional feeling about G.D.P. is that the more it grows,
the better a country and its citizens are doing. In the U.S., economic activity plummeted at
the start of 2009 and only started moving up during the second half of the year. Apparently
things are moving in that direction still. In the first quarter of this year, the economy again
expanded, this time by an annual rate of about 3.2 percent.
All the same, it has been a difficult few years for G.D.P. For decades, academics and gadflies
have been critical of the measure, suggesting that it is an inaccurate and misleading gauge
of prosperity . . . In the U.S., one challenge to the G.D.P. is coming not from a single new
index, or even a dozen new measures, but from several hundred new measures - accessible free
online for anyone to see, all updated regularly. Such a system of national measurements, known
as State of the USA, will go live online this summer. Its arrival comes at an opportune moment,
but it has been a long time in the works. In 2003, a government official named Chris Hoenig
was working at the U.S. Government Accountability Office, the investigative arm of Congress,
and running a group that was researching ways to evaluate national progress. Since 2007, when
the project became independent and took the name State of the USA, Hoenig has been guided by
the advice of the National Academy of Sciences, an all-star board from the academic and business
worlds and a number of former leaders of federal statistical agencies. Some of the country's
elite philanthropies - including the Hewlett, MacArthur and Rockefeller foundations - have
provided grants to help get the project started. "
That's your weekend homework assignment . . .
Selected Comments
tamesthyena:
The US moved from GNP to GDP when those pesky Exports-Import accounts started going negative
in the early Eighties. The US authorities then encouraged the IMF to rebase their Purchasing
Power Parity adjustments at the core of making real international economic comparisons when
the Nominal GDP numbers using regular Dollars started to make the Chinese economy look too
large for comfort two or three years ago.
Now they are focusing on what, Happy National Production as the measure for economic performance?
These adjustments are to clear thinking macroeconomics and policy making what Pro Forma earnings
are to Accurate Accounting and investing; they initially intentionally delude the public, and
end up softening the blow of relative economic decline
riverra:
Progressive and environmental economists have long recognized that GDP is a grossly inaccurate
measure of how well we are doing economically. Principal reasons are that it counts a lot of
"bads" as well as "goods"- anything that generates cash flow (e.g. money spent on cigarettes)
and externalizes (does not count) a range of negative externalities that arise from economic
activity (e.g. pollution produced when we import goods on container ships).
One of the original alternative measures to gain traction was the Index of Sustainable Economic
Welfare (ISEW), which is similar to the later Genuine Progress Indicator (GPI).
The problem with measuring GDP cuts to the heart of what an economic system is for. Presumably,
economic systems exist to maximize the welfare of their participants in some way. Whenever
GDP is mentioned intelligent analysis should necessarily include what the GDP level means for
per capita income and then how that income is distributed. Otherwise, you just get an abstract,
meaningless number.
When China takes the top GDP spot in the world in the next few years as it surely will, its
people will still, on average, be far less well-off than the US, Japan, and most every other
developed economy on the basis of both per capita income and the distribution of that income
among its people.
alfred e:
Ouch! I still sting from how Clinton and Boskin raped America for the federal government's
benefit. CPI my ass.
Once I have that recalled I am off-base and beyond logic.
It just all becomes more unbelievable every day. And we get to eat it.
mgkurilla:
It's even worse than merely comnig to grips with a realistic and honest GDP figure. Currently
GDP makes no effort to evaluate the sustainability of the growth. All the low interest rate
credit inducing growth earlier in the decade was worse than unsustainable, it was metastatically
toxic to everything else.
In addition, we don't distinguish between GDP contributors that
are functionally merely extractive based generators of GDP (like GS) versus the truly growth
promoting activities. If you pay to tear down an eyesore in a city, you contribute
to GDP. But there's a difference if you stop there versus doing something economically useful
with that location.
Health care is another component that can go either way. Spending 25% of our health care dollars
on the last 6 months of life is not going to produce returns down the road. This is why there
is usually a disconnect between main street and wall street.
ezrasfund:
GDP is a very crude measure, indeed. Yesterday's computer, slow and expensive, added more
to GDP than today's much faster and cheaper device. The NYTimes I read today online, updated
every few minutes, adds less to GDP than the paper that was printed, distributed and sold.
That unnecessary surgical procedure adds more to GDP than a wellness
program. That auto accident resulting in a totaled car adds more to GDP than
a safe trip.
Our pursuit of GDP has gotten us a lot of things we don't need, including plenty of financial
services, lots of expensive medical procedures, and some houses in AZ.
Moss:
Well stated ezrasfund.
The existing GDP measure always puts emphasis on more quantity with no real measure of feedback
loops either positive or negative. Energy efficiency, clean air or water, safety, health….
Eating less will reduce GDP but probably go along way to having a healthy population and a
much less expensive health care system.
Joseph Martinez:
Since the hegemony forces are behind the 'State of the USA' that is the overpaid all-star
board from the academic and business world and some of the country's elite philanthropies just
how accurate can it be?
As part of the middle class I have seen the middle class real income increase 0% in the
past ten year and have watched that the income of the people that are behind the 'State of
the USA' increase 100% to 1000%.
I can't take any prudence in the report. I know that the USA status in the world is in question
but to have another report out moving numbers around again is not what we need.
evans:
Best argument against GDP per capita as a measure of comparative
well-being is the position of Ireland in OECD or World Bank tables.
One only has to spend a few days traveling around there to realize that its "wealth" is illusory
(as we are now discovering).
Even back in 2007 when it was flying, it was a "poor" country:
crappy houses; crummy public infrastructure; and–not that it counts in these figures– a provincial
and derivative culture.
The fact that it scores higher than Canada, Denmark, or Germany says it all.
1 Luxembourg 78,559
- Macau 59,451
2 Norway 58,141
3 Singapore 49,288
4 United States 46,716
5 Ireland 44,195
- Hong Kong 43,922
6 Switzerland 42,534
7 Netherlands 40,850
8 Austria 38,153
9 Sweden 37,383
10 Iceland 36,770
11 Denmark 36,604
12 Canada 36,444
13 Australia 35,677
14 Germany 35,613
15 United Kingdom 35,445
16 Finland 35,426
17 Belgium 34,493
18 Japan 34,099
19 France 34,045
World Bank GDP p.c. (PPP) 2008
Actually, GDP overstates national well-being. From the point of view of anyone who works
for a living, the GDP is nearly irrelevant. Since the start of the 80s, an hour of work has
meant less and less in terms of per-capita share of the GDP. That is, the GDP has grown, and
it has grown faster than the population, but working an hour gets you less and less of it.
If you look at the current recession, which has supposedly ended because the GDP is rising
again, then you can see the disconnect is complete. GDP can rise all it wants, but your hour
of work will get you no more, and that's assuming you can get an hour of paid work.
MikeinNOLA:
"Ezrafund has it right…moreover, the existence of a GDP stat gives positive feedback to
the Keynsian babboons who think that juicing the number with QE or stimulus number is the equivalent
of a recovery….They don't seem to get the difference between cause and effect: a good economy
will produce a good GDP, but having a good GDP doesn't mean you have a good economy."
Ezrafund does indeed have it right. Same point I was trying to make, but in a less verbose
and more direct fashion.
I think MikeinNOLA misinterprets the potential of Keynesian stimulus though.
To be sure, shoveling borrowed money into the economy without proper analysis of true costs
and benefits can easily exacerbate problems with mindless GDP growth that alternative measures
of economic well-being are designed to account for. But if stimulus money is spent on sustainability-oriented
infrastructure such as mass transit, greater energy efficiency, etc. per capita economic well-being
may very well increase over the longer term.
In other words, whether or not Keynesian stimulus spending makes sense depends to a great
degree on what the money is being spent on or invested in. Analytical tools such as ISEW and
GPI are intended to facilitate better decision making about precisely these kinds of issues.
markwax:
"Gross National Product counts air pollution and cigarette advertising, and ambulances to
clear our highways of carnage. It counts special locks for our doors and the jails for the
people who break them. It counts the destruction of the redwood and the loss of our natural
wonder in chaotic sprawl. . . .
Yet the gross national product does not allow for the health of our children, the quality
of their education or the joy of their play. It does not include the beauty of our poetry or
the strength of our marriages, the intelligence of our public debate or the integrity of our
public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning,
neither our compassion nor our devotion to our country. It measures
everything, in short, except that which makes life worthwhile.
And it can tell us everything about America except why we are proud that we are Americans."
Robert F. Kennedy, 1968.
Mike in Nola:
riverrat: You from NOLA, too?
Although, I can't claim an extensive knowledge of Keynes theory, it seems mostly to prescribe
deficit spending during recessions. I don't count what you describe as really Keynsian; it's
just common sense spending that might do some good along the way and probably should have been
started even when we didn't have huge deficits. As long as we are having to pay extended unemployment,
we should have a new WPA, not just thowing money at states to support the same old bureaucracies
that employ many administrators who don't really produce anything.
The most destructive ideas in academia are those that are technically defensible but nonetheless
encourage erroneous intuitions. In economic science, a prime example of such a destructive idea
is GDP accounting. As the recent punditry on the "inventory blip" of the fourth-quarter growth
figures perfectly illustrates, the mainstream macro framework leads us into absolute absurdity.
The GDP Hall of Shame
In previous articles, I have pointed out that the familiar GDP accounting tautology, Y = C
+ I + G + X, is technically correct, but leads many economists to abuse the equation and in the
process make horrible policy recommendations.
For example, it is this typical macro framework that leads our financial press to assume that
saving is bad because consumer spending
"is responsible for" so much of the economy. The national-income tautology also recently led Paul
Krugman - who won the Nobel for his work on international trade theory - to (apparently) commit
a basic mercantilist fallacy in a quick
blog post.
GDP and Inventory Adjustments
Before we dive into the latest confusion, let's review the theoretical relevance of changes
in inventories when it comes to calculating GDP. First of all, remember that Gross Domestic Product
tries to measure the total amount of finished goods and services produced during a particular
period (typically three months or a year).
In practice, the Bureau of Economic Analysis (BEA) estimates how much consumers, businesses,
government, and foreigners spent on finished goods and services (made in the country) during the
period in question. Let's say it was $10 trillion. Then, the BEA looks at the change in the value
of inventories during the period. So if inventories started out at $500 billion and ended up at
$400 billion, then inventories fell $100 billion.
Now the last step is to adjust the "final demand" figure by the change in inventories. In our
case, the $10 trillion in total purchases must be adjusted to only $9.9 trillion in new production
during the period, because $100 billion of those purchases were fulfilled by drawing down inventories.
So yes, those goods were produced within the country and contributed to GDP, but they did so
in a previous period and were already counted in an earlier GDP figure. It would be double
counting the same production if we included $100 billion of output
when a business "invested" by buying the newly produced output and throwing it in the warehouse
and then again
when the retailers moved the goods from the warehouse and into consumers' houses.
So far, so good. Setting aside the severe conceptual and data problems for GDP estimation,
it is an obvious refinement to look at changes in inventories to better isolate how much "stuff"
was actually produced in a certain period, as opposed to how much stuff was purchased.
The Economists Make a Mess of Things
Even though technically the inventory adjustment makes sense, in practice economists botch
things horribly. (We do this a lot.) Recently, when the GDP estimates for the fourth quarter of
2009 came out, many cynics dismissed the 5.7 percent "headline figure" as being mostly an "inventory
blip" or an "inventory bounce." Although he was not alone, AEI economist Kevin Hassett was the
most forceful I saw on the topic, so it's worth quoting from his
Bloomberg
article:
When is quarterly gross domestic product growth of almost 6 percent bad news? When it looks
like what was reported last week.
US GDP increased 5.7 percent at the end of last year, with more than half of that growth
- 3.4 percent - attributable to changes in inventories. This astonishing impact of inventory
has ample historical precedent, and the bottom line has terrible implications for 2010.
Inventories are a remarkable corner of the economy. They are the goods and materials that
companies keep on hand to make sure that their operations run smoothly. They are the boxes
of food on shelves at the grocery store and the bins of metal parts sitting next to the assembly
line in a manufacturing plant.…
Inventories are even more important during recessions. In [a] paper, co-authored with Louis
Maccini in 1991, [Alan] Blinder found that 87 percent of the decline in GDP from the peak to
the trough of the recession was attributable to inventories.…
Since 1970, there have been nine quarters, like the last one, when GDP grew by at least
3 percent and inventories accounted for at least half of that growth. The history of those
quarters is hardly a favorable sign of what is in store. (emphasis added)
First, let us note the familiar problem with relying on conventional GDP calculations. Hassett
talks as if inventories themselves have some power to steer the economy, as opposed to the human
choices underlying changes in inventories. It's a bit like saying 87 percent of fevers
can be attributed to thermometers.
But when it comes to the discussion of last quarter's GDP figures, the focus on inventory changes
is particularly perverse. I bet those readers who don't already know the answer would have been
quite confident after reading Hassett's article that inventories rose in the fourth quarter.
After all, it would make sense for someone to say, "Sure, production was up 5.7 percent in
the 4th quarter of 2009 compared to its level in the 3rd quarter. But that spike in output is
unsustainable, because 3.4 percentage points of the growth went right into warehouses. It's not
as if the final consumers picked up their spending by the full 5.7 percent."
As I say, the above reasoning would be problematic because it presumes that spending green
pieces of paper is the ultimate source of prosperity, but besides that, it would make a certain
sort of sense.
Yet that's not what happened in the fourth quarter of 2009. No, inventories fell, as
the BEA's
press release makes clear:
Real gross domestic product - the output of goods and services produced by labor and property
located in the United States - increased at an annual rate of 5.7 percent in the fourth quarter
of 2009.…
The increase in real GDP in the fourth quarter primarily reflected positive contributions
from private inventory investment, exports, and personal consumption expenditures (PCE). Imports,
which are a subtraction in the calculation of GDP, increased.
The acceleration in real GDP in the fourth quarter primarily reflected an acceleration in
private inventory investment, a deceleration in imports, and an upturn in nonresidential fixed
investment that were partly offset by decelerations in federal government spending and in PCE.…
The change in real private inventories added 3.39 percentage points to the fourth-quarter
change in real GDP after adding 0.69 percentage point to the third-quarter change. Private
businesses decreased inventories $33.5 billion in the fourth quarter, following decreases of
$139.2 billion in the third quarter and $160.2 billion in the second. (emphasis added)
The BEA's press release is a testament to the Orwellian nature of GDP accounting. An innocent
person would have every reason to assume that phrases such as "positive contributions from private
inventory investment" and "an acceleration in private inventory investment" meant that inventories
rose in the fourth quarter. But, as the press release says, inventories actually fell
by $33.5 billion.
What's really strange is that the change in inventories was fairly small. So the real "contribution"
was not even the change in inventories, but the change in the change. In other words, we have
moved the analysis one more step into absurdity by explaining the creation of real goods and services
by referring to the second derivative of something (inventories) that does not have the
power to create goods and services.
A Numerical Illustration of the Absurdity
I have tried to spell out my frustration with the typical handling of GDP inventory accounting
to my colleagues, and yet
the sharpest of them were nonplussed to say the least. But I hope that the following numerical
example will show quite convincingly just how crazy the techniques that I've described above are.
Suppose we have an economy with the following characteristics:
Year
Starting
Inventories
Ending Inventories
Final Purchases
GDP
GDP Growth
2010
$1 trillion
$1 trillion
$2 trillion
$2 trillion
N/A
2011
$1 trillion
$0
$2 trillion
$1 trillion
−50%
2012
$0
$0
$2 trillion
$2 trillion
+100%
Of course, the numbers above are completely unrealistic, but they can illustrate the knots
we tie ourselves in when worrying about inventories.
First, let's make sure we understand the cells in the table. In 2010, inventories didn't change,
and so the only way people could consume $2 trillion in purchases of finished goods and services
is if that output were actually produced during 2010. Hence GDP is also $2 trillion.
Things are different in 2011. People still bought $2 trillion worth of total stuff. However,
only half of that was newly produced in 2011, because the other $1 trillion was taken from
the inventory stockpile. That's why GDP fell in half, down to $1 trillion.
In 2012, people once again spent a total of $2 trillion on finished goods and services. Since
inventories didn't change during the year, obviously these purchases were consummated through
entirely new production during the period. Hence, GDP rose back up to $2 trillion for the year,
a 100-percent increase over the previous year's level of output.
Now in this context, look at what someone like Hassett would be forced to say after the 2012
number came out: "Sure, the BEA and the press are running around celebrating the ostensible doubling
of real output in 2012. But if you dig into the numbers, you see that fully 100 percent
of the growth is attributed to the $1 trillion acceleration in private inventory investment. If
we net out the contribution of inventories to GDP growth in 2012, we see that growth was zero.
We should be prepared for a double dip in 2013, after this one-time blip of statistical GDP growth."
I hope the reader sees just how nonsensical this type of analysis would be for the table above.
In what possible sense did inventories "contribute" to GDP in the year 2012? Inventories didn't
even exist at any point in 2012. They were $0 at the beginning of the year, and $0 at the
end of the year.
What happened is that people spent $2 trillion buying stuff, and workers took raw materials
and other inputs and transformed them into $2 trillion of real output. This was twice as much
as the same workers physically produced in 2011. So how in the world does an "inventory adjustment"
- from $0 to $0 - cancel out that doubling of physical production?
Furthermore, is it really true that we need to worry about real GDP falling off a cliff after
such a huge "inventory bounce"? After all, final demand has been steady at $2 trillion for three
years straight. And even if entrepreneurs got spooked again and wanted to draw down inventories
to satisfy their demand in 2013, they can't - there are no inventories to draw down.
It's true that someone like Hassett could point out that the growth of GDP was bound
to collapse, but so what? There would have presumably been huge unemployment in the year 2011,
as half of the economy's productive resources sat idle. Yet in 2012, all those resources would
be back in normal operations. Those workers, tractors, drill presses, etc., wouldn't have any
reason to see their usage dwindle in 2013, despite the massive "inventory contribution" to GDP
growth in 2012.
In fact, to the extent that businesses want to rebuild their inventories in 2013 to give themselves
a buffer greater than $0, workers will need to put in extra shifts. Under any reasonable standard,
the situation of inventories in 2012 would lead us to expect GDP and employment growth
in 2013. It's true, there would be a drop in the growth rate of GDP, but workers care more
about their hours than they do about second derivatives of arbitrary magnitudes.
Conclusion
The textbook GDP equation is not false; it is a tautology and so of course it is true. Nonetheless,
it is a destructive framework for thinking about macroeconomic events. Abuse of the equation leads
economists and pundits to blame savings and praise reckless consumption, to hate imports and love
exports, and (in principle) to attribute a doubling in the flow of goods coming out of factories
to a nonchange in the level of a nonexistent stock of inventory.
Hassett and others are right to doubt the strength of our alleged "recovery." I think that
the economy is currently held together by bubble gum and Ben Bernanke's charm. But to explain
our economy's fragility, I would analyze
the government and the Fed's policies. A slowdown in the fall of inventories per se
is not a warning sign at all. If anything, it is a signal that businesses are becoming more optimistic.
Deficits measure maladaptive behavior, the failure to effectively save, and invest in future
viability, to maximize NPV and induce growth. Capital is in trouble because it failed to invest
in the future, and the current policy of infinite monetary policy (see Freddie and Fannie)
is to accelerate the short, now that the future, demographic deceleration, is here.
There is no way to measure I because capital borrowed from the future to create "earnings"
as the basis for borrowing again, compounding the error, to magnify C, supplying artificial
demand abroad to create global dependency, increasing self-interested G to process the transactions.
I, C, & G are all artificial, because GDP never measured economic
profit; it measures economic activity, maximizing borrowing from the future
to pay increasingly irrational, maladaptive costs, to bail out capital – eliminating the path
to the future.
Healthcare is classic, 20% of the economy to subsidize maladaptive
behavior, created by the ponzi capital pyramid between producers and consumers in the food
chain, a problem that would quickly solve itself if the structural subsidy to capital were
removed.
Monetary policy is being employed to create artificial scarcity, social demand, to re-enforce
non-performing capital and the government serving it.
The constitution was designed to protect the majority from these self-liquidating circumstances.
Shorting the constitution with family law terminated savings and investment, doubling down
on debt and consumption, in a too-big-to-fail strategy, that always fails. Capital had a going-away
party.
The US Supreme court, on the vote of a handful, removed the evolutionary lead of natural
new family formation, discharging the middle class battery to ground, capital.
Capital breeds on the laws of property. Labor breeds on the laws of physics. They had an
agreement to grow a semi-neutral middle class. Capital broke that agreement under the false
assumption that its global economy was the only "game" in town. Labor is protected by its relationship
with evolution, and always has access to ground, alternative capital.
The point in developing the Internet was to make the process transparent. The dismantling
of the USSR was just a beta test.
The dinosaurs were a sunk cost. Everyone clutching non-performing assets may want to make
a new years resolution, or continue partying. Titration is nearly complete, non-performing
capital is turning to salt, and social evolution is about to accelerate again.
Now, we watch as the municipalities are pushed over the cliff, as the momentum of global
implosion hits American shores, but at least the feds got a big pay raise for putting the states
and municipalities at the edge of the cliff first, to buttress themselves.
"Thrift in the long run is a very good thing, but increasing thrift as you come out of a
recession is going to be a drag." "
Most economists focus on increasing our GDP. They understand its limitations, but after
20 or 30 years of measuring how good an economic policy is by how much it increases GDP, they
tend to forget the limitations in their daily work. So when a recession comes along, the reaction
is reflexive - the recession decreases measured GDP, and that is bad, so do whatever is necessary
to reverse that, setting aside longer-term considerations.
Martin Feldstein is very smart, but he has been completely captured by the always-increase-GDP-at-all-costs
faith common amongst professional economists. This is not healthy. It's like identifying hunger
as a problem that must be eliminated at all costs. For truly starving people, the resulting
actions are great and good. For middle class Americans going from lunch to dinner, it's unhealthy
to keep feeding them snacks so that they feel no pangs of hunger.
The recent financial scare and economic recession was a signal that we were doing some things
wrong. What we need now is a recognition of what we were doing wrong, and public decisions
on the changes. That might result in a decrease in measured GDP, but it would lay a solid foundation
for a more productive economy for us all going forward. Instead we have people like Martin
Feldstein calling for actions that return us to the old ways, because measured GDP was higher
then. Nuts!
Also you might want to watch Chris's videos on GDP. You own
a home and they say, well you'd pay 5k a month in rent. Even though you don't pay rent they
DO add it to GDP.
GDP and inflation are as baked as Ken Lay's books.
You can fly your plane or drive your car and believe that you have a full tank, when your
car runs out of gas and the realization that the gauge was busted sinks in it might not be
a pretty sight if it is raining and night and cold and you have a little one in the car.
Best of luck folks, this site has been removed from my RSS reader. Deleted like CNBC's.
Gosh, I can still hear Maria's voice. Ughh,.
American GDP figures are wildly distorted, this has never gotten
the press it deserves. The US is the ONLY economy that uses hedonic adjustments
to GDP. That means it increases GDP to allow for the fact that computers have become more productive
over time (this is completely different than the hedonic adjustments for inflation, BTW).
A modern desktop computer is about as powerful as a mainframe as of late 1980s. So I kid
you not, these adjustments started in 1987, and they count you desktop in GDP as the same value
what the equivalent big iron computer would have cost in 1987.
Mish managed to get the BEA to send him a spreadsheet in 2005, and it showed the cumulative
impact was 22% of GDP. This is far and away the most dubious of the official
statistical adjustments, and gets far and away the least commentary.
The Bundesbank has also complained a few years ago that if German calculated GDP the way
the US did, it's growth rate would be a half a percent higher. If you take the Bundesbank figure
instead, and calculate GDP growth over 22 years, using 2.5% versus 3.0% growth, you get an
11% cumulative difference.
Yesterday, the market moved on what was the double whammy of the government's own rather fluid
favorable interpretation of what was essentially the government's very own stimulus. Yet others
can play, and unwind, the number fudging game too. According to David Rosenberg, absent the now
declining impact of the massive governmental stimulus, GDP would have been flat if not negative.
So much for bickering over whether GDP was 2.7% or 3.5%: at the end of the day, on a normalized,
non-stimulus inflated basis, GDP was flat, and if the equity market cared about isolating non-recurring
items such as excess government spending driving a collapsing economy, the stock market reaction
would have been quite the opposite.
From Rosenberg:
Never before did a gap between a 3.2% consensus GDP forecast and an actual print of 3.5%
manage to elicit so much excitement in the equity market. It just goes to show how speculative
the stock market has become. The question is why it is that the economy couldn't do even better?
Historically, the auto sector adds 0.1 percentage point or 0.2 percentage point to any given
GDP report. In the third quarter, courtesy of cash-for-clunkers, the sector added 1.7 percentage
points to the headline figure, which is less a than 1-in-10 event in terms of probabilities.
Tack on the rebound in housing and government spending and the areas of GDP that received the
most medication from public sector stimulus contributed almost all of the growth in the economy.
You read this right. If not for all the government incursion into the economy in Q3, real GDP
basically would have stagnated.
Because of the housing and auto subsidies, the personal savings rate plunged to 3.3% in
Q3 from 4.9% in Q2 - in the past quarter-century, there have been only four other times that
the savings rate went down so much in one quarter. If not for that plunge in savings, real
GDP actually would have contracted fractionally last quarter. The entire GDP growth was funded
by a rundown in the savings rate that occurs less than 5% of the time.
Moreover, what is normal in that first positive post-recession GDP release is a 5% annual
rate of growth. That puts 3.5% in Q3 into a certain perspective, especially when you consider
the massive amount of stimulus that underpinned the latest batch of data.
What is normal in this first positive post-recession GDP release is a 5% annual rate of
growth, not 3.5%
The parts of the economy that did not receive government support didn't fare too well in
the third quarter. For example, total business spending (on structures, equipment and machinery)
actually contracted at a 2.1% annual rate - the fifth decline in a row. State and local government
spending also fell at a 1.1% annual rate. Since there was no cash-for-clothing program, spending
on apparel slipped at a 1.5% annual rate. The economists had all been talking about an inventory
cycle taking hold and yet there was an additional $130 billion of de-stocking in the third
quarter.
a critical question that nobody seems to be asking: how are companies reacting to this presumed
economic rebound? If CapEx, inventories and lending, corporations are the only ones who seem to
be willing to think about the facts behind the hype:
The question has to be asked, if companies, both non-financial and financial, are big believers
in this new post-recession V-shaped recovery that seems to have the hedge funds and most strategists
excited, why are companies still cutting back in capital expenditures and inventories and why
are banks still cutting back on lending at an unprecedented 15% annual rate.
David concludes with a point that he tried to highlight on Fast Money yesterday, if only he
wasn't caught up in futile debates over trivial data points:
While it seems very flashy, 3.5% growth is far from a trend-setter. Let's go back to Japan.
Since 1990, it has enjoyed no fewer than 19 of these 3.5%-or-better GDP growth quarters. That
is almost 25% of the time, by the way. And we know with hindsight that this was noise around
the fundamental downtrend because the Japanese economy has experienced four recessions and
the equity market is down more than 70% from the peak. What is important for the future is
whether the U.S. economy can manage to sustain that 3.5% growth performance in the absence
of ongoing massive government stimulus. In other words, it may be a little early to uncork
the champagne.
From our lens, the big risk going into Q4 is a renewed contraction in real final sales.
That is not priced into the various asset classes right now.
Indeed... until that can falls off a cliff. This 3.5% GDP growth is a debt-financed
fiasco. The detriment is not only that this GDP growth is unnatural and likely
temporary, but that future (natural) growth in GDP will be gutted by the Gov/Fed so that
they can service the outstanding debt responsible for this current 'growth'.
chindit13
If we can believe this recently released Q3 GDP figures---and why would a rational
person ever question an official government statistic---then Ben Bernanke is dead right:
HE SAVED THE WORLD.
Those pundits on the tube can talk all they want about China's miracle growth or how
industrious Asia will lead the world out of this economic mess, but according to the
numbers---and numbers don't lie---the US is the one leading the Chuck Prince "I'm Still
Dancing" Two Step, and the rest of the world is just along for the ride.
How, you may ask...and ask you may. Given the relative sizes of the world's economies, just
this third quarter surge in the US brought to you by C4C, residential short sales, iPhones,
Kindles, pawn shop and bankruptcy lawyer receipts represents more of an addition to World
GDP than all the growth of all Asian economies combined, including the glorious Middle
Kingdom and its 8.8888888%, M3 driven, comrade-can-you-spare-me-a-loan, Cha-shu
balls-to-the-wall supergrowth. So much for the Pacific Century eh? Pikers, they are.
Who would have thought, oh ye of little faith and even less credit, with all that
unemployment, all the boarded up storefronts, empty shopping malls, and Goldman Sachs
partners purposely refraining from ostentatious displays of their spending ability, we
could have kicked the butts of copper-hoarding Chinese pig farmers nine ways from Tiananmen
Square.
Somehow, in spite of the constant stream of gloom and doom permeating from every
sociopathic blogger this side of Sofia, the Great Machine of American Consumption ( the new
GMAC) found a way to churn out 5.5 Goldman Sachs Bonus Pools (a new international unit of
measurement on course to replace the metric system) worth of brand spanking new growth that
wasn't there before, or at least wasn't there in Q2 (and may not be there when revision
time comes).
Yes, those 306 million plucky Americans generated almost as much new growth in a quarter as
five guys in AIG Financial Products Division lost in Q3 last year. THAT's getting it done!
Slackjawed I am, and I hereby apologize to my least favorite deli counter trio BLT (Ben,
Larry and Timmy) for being a wag and calling this the Growthless Recovery. Instead I'm
calling it as I see it: the Potemkin Recovery.
Anonymous
Used to be that the wealthy in this country were steel magnates, owners of mining
concerns, hoteliers, railroad tycoons, industrialists.
It has become the 2/20 hedge fund managers that have taken their place. Running a warehouse
full of quants with a dollop of industrial espionage to play buy/sell with paper and
electronic IOUs.
All the while that is funded by pension funds, 401K, trust funds, little sums set aside
which must be "invested" to stay ahead of the time deterioration thanks to the Fed's
inability to preserve the storage value of the currency.
Those little nickle/dime returns helped to salve the fear that the ponzi investors really
weren't that deeply into "risk". Until the bottom fell out, gov't reared its ineffective
and complicit head, and the private central bank showed extreme partiality in dispensing
economic injustice upon the peon classes.
The great wake up occurred. The push is for people to divest from the paper trade, to take
greater steering power over their retirement portfolios, and to step back from risk taking
(now seen as pure loss making).
The capital markets have lost all legitimacy. The money flows will continue to be out
especially as we witness Fed machination on one hand, and gov't arbitrary stimulus on the
other.
With the excess being squeezed from the system, peon withdrawals, and leverage multiples
being pulled down, the finance sector (though on a dope high at present) faces a bleak
future.
Do they think they can create another quick generation to con into the parlour games?
Submitted by Edward Harrison of Credit Writedowns.
Let's say I run a company. For the
sake of argument, we'll call it a shoe store in New York City. I am making $100,000 net per year
now. But, I look around me and see huge opportunity for growth. So I go to my bank and ask for
a loan to expand my business. I invest the money in expanding the store, and over the next five
years I increase my earnings to $140,000. Not bad!
Is this a well-run business?
GDP is not enough
Well, if your first instinct is to say, "you didn't give me enough information," I would have
to agree. But, this is the way GDP statistics are used to measure the success of an economy.
Clearly then, GDP is an inadequate measure for understanding how healthy an economy is. Nobel
Prize-winning economist Joseph Stiglitz brought this issue into the public domain last week when
he spoke in Paris, calling the focus on GDP a 'fetish' and favoring a broader measure of economic
health.
Stiglitz was responding to reporters after a study on alternative measures of economic growth
commissioned by French president Nicholas Sarkozy was released. At the time,
Bloomberg
reported Stiglitz saying:
GDP has increasingly become used as a measure of societal well-being and changes in the
structure of the economy and our society have made it increasingly poor one…
So many things that are important to individuals are not included in GDP. There needs to
be an array of numbers but we need to understand the role of each number. We may not be able
to aggregate everything together.
Stiglitz is talking about the social costs of growth here. Think about pollution, infant mortality
rate, healthcare, life expectancy, or rates of obesity to name a few. And his views are echoed
in an article which prompted this tirade from me called "Emphasis
on Growth Is Called Misguided" by Peter Goodman in today's New York Times. Read it.
However, in this post, I want to focus on one narrow issue: debt.
The income statement vs. the balance sheet
In the shoe store example I gave, I borrowed money to fund growth. In assessing how successful
my growth strategy is, the obvious question is: how much did I borrow?
It's the debt,
stupid.
What if I borrowed $1,000,000 at 7% interest? $40,000 is a return of 4% on that money, less
than the cost of debt. In that case, the growth strategy is a loser.
We need to see the balance sheet as well as the income statement to know what is happening.
GDP gives us no insight into the balance sheet of an economy, and is therefore incomplete as a
measure of economic health. (I'll leave the cash flow statement for another day!)
There is 4% growth sustained only through a rise in debt, growth that would have been 2% without
an increase in relative indebtedness. And there is 4% growth fuelled by a positive return on that
debt.
I am sure you have seen the graphs I published last October at the height of the panic in my
post "Charts
of the day: US macro disequilibria." What should be clear from those charts is that the U.S.
has been living in a period fuelled more by increases in debt and a concomitant increase in asset
prices than in a world of sustainable growth.
The economics profession focus on the income sheet only
I suspect the GDP fetishism owes a lot to the models currently in use in the economics field,
which focus exclusively on an economy's income statement.
When I studied economics, in our introductory course, we used a book called "Economics – Principles
and Policy" by two Princeton-affiliated professors
William Baumol and
Alan Blinder, a former
vice chairman of the Federal Reserve (Yes, I still have the book from over twenty years ago).
The only mention of debt comes in Chapter 15 on "Budget Deficits and the National Debt" and it
is basically a discussion of trade-offs between budget deficits and inflation.
Nowhere are aggregate debt levels in the private sector mentioned. Now, I could be wrong because
it is not in the index and I couldn't find it in the book. I see this is reflective of the absence
of debt as a topic in economic theory taught in universities.
In fact, the Chapter just before is called "Money and the National Economy: The Keynesian-Monetarist
Debate." I think the title says it all. Baumol and Blinder are Keynesians and they released a
book to teach Economics in the Keynesian tradition. To the degree they discuss any other economic
models, it is only to weave the monetarist view into their own framework. In the introduction
of Chapter 14, the book states:
Then we turn to a very old and very simple macroeconomic model – the quantity theory of
money, and its modern reincarnation, monetarism – for an alternative view of the effects of
money on the economy. Although the monetarist and Keynesian theories seem to be two contradictory
views of how monetary and fiscal policy work, we will see that the conflict is more apparent
than real.
Now that crisis has hit, there is no inter-weaving of theories. Those two worlds, the monetarists
(freshwater economists as Krugman calls them) and the Keynesians (saltwater economists in